When you select "Template" in the "Specified in:" option, you will see a large window with several options.
Frame
You have two options in "Origin:"; Random, and Fixed.
When you select "Fixed", you will see the following options:
In "Wallpaper:" you specify or select the name of the background wallpaper for the Frame.
When you select "Random", you will see the following options:
In "Directory:" you select a file inside the directory you want to pick your graphics from.
Tip: If you want a file or directory relative to the one where the program will run, instead of a full path enter (or modify after select) a dot and a back slash before the subfolder. For example, if there is a "photos" folder inside your program folder, with a file nice.jpg inside it, you can type here ".\photos\nice.jpg" instead of the hard path.
For both options, "Mode:" refers to the way the wallpaper is displayed. "Stretch" to fill the window, "Tile" to repeat itself at real size filling the window, and "Centered" to be placed once on the center of the window at real size.