Here's an example of code I use to create a piece of frame background. The images don't have to be in a seperate directory but personally I do it for a little more organization. This is a snippet from my frame background, it's 1 of 6 pieces. I also found that WoW prefers images with dimensions of 256 x 256, 512 x 512 and so on but smaller ones 128 x 64, 32 x 32, 64 x 64 etc. It was trial and error to get the sizing right for me.
I use "Gimp" to create the tga's, "Tilesplitter" to make the 256 squares and believe it or not "Windows Paint" to create the original images.
Hope this helps
Code:
<Frame name="TopSkinTexture1Right">
<Size>
<AbsDimension x="512" y="32" />
</Size>
<Anchors>
<Anchor point="TOPLEFT">
<Offset>
<AbsDimension x="245" y="-31" />
</Offset>
</Anchor>
</Anchors>
<Layers>
<Layer Level="ARTWORK">
<Texture name="DWMBgS2" setAllPoints="true" file="interface\AddOns\yourmod\images\Purple-Panel_S1a">
<TexCoords left="0" right="1" top="0" bottom="1" />
</Texture>
</Layer>
</Layers>
</Frame>