You need dds or tga,i think jpg and bmp work too. you need separate images for each frame, they need to follow a specific sequence.
Image.dds the base image
Image00.dds (a copy of the base image, this is the first image shown in the sequence, the base image itself is not shown)
Image01.dds (frame 2)
Image02.dds (frame 3)
You need to set it up in the material properties. But If my memory serves me correctly, btb's image animation doesn't work properly. You can use simed if you have it. In BTB you can have the animation cycle 2 images.
You have set it up in xpacker.
You need to specify what type of animation (in you case cycle), the order the images show at and at what framerate they change. Remember the first image is 0 the second is 1.
In the simed material editor you set the animation to 'cycle', then if you have 4 images the sequence would be 0,1,2,3 I cant remember exactly what the frequency is, weather its seconds or just some value, but have a play with the frequency until you have it how you want.
My workaround was to make a 2 frame animation as a place-holder and I will put the full animation in the final version of my track via BTB (if xpacker gets fixed), and 3dSimEd, or Max if not.
I also ran into this wall with my Gazelle camera helicopter.... The animation on the helicopter is a child object for the rotors... Once I have finished the UVW map on it's fuselage, I'll post all the files here so others can use it.