If your installation is working and you're seeing the workspace and able to create projects then any web compatible image format should work.
Bottom left of the workspace is a link that says demo which plays a local copy of this video
xot.xerte.org.uk/play.php?template_id=102#page1
That's a very basic demo of creating a Xerte project and adding some pages.
Try adding a graphics and sound page and try adding an image to that. (you don't need to add sound)
Remember that file names should not have spaces and images should be web compatible e.g. .jpg, .png, .gif, .svg and if you are using xampp with it's default settings then the upload limit is probably 2mb so your images will need to be below that file size or else you'll need to increase the php upload limit.
Do a search for increasing the maximum upload file size in xampp