Hi Zeshan,
from my experiments (using Moodle 1.4.3 and the HotPot module v.20040305), the graphics and videos work OK in a HotPot quiz as long as you have the mediaplugin installed (download from http://moodle.org/download/modules/#filters) and enabled (add to the list of Filters in Admin Configuration Variables) and use a <BASE> tag in the head of the HotPot quiz.
I tried creating a HotPot quiz using a gif in one question and an mpg in another. The links were specified relative to the quiz file, like this
- insert a <BASE> tag into the HotPot quiz
- Options->Configure Output->Custom, Code for insertion into <HEAD> tag
- <BASE href="http://your-server/moodle/file.php/xx/">
- "xx" is the course number, and I think the trailing slash, "/", is important
- link for the image file:
<IMG src="images/images-and-videos/q1.gif"></IMG> - link for the video clip:
Watch <A href="images/images-and-videos/q2.mpg" target="_blank">this video</A>
I uploaded the quiz and media files to the Moodle server using the "Files" menu option for the course.
I could then view the quiz "raw" (i.e. not via the HotPot module)
http://bateson.kanazawa-gu.ac.jp/moodle/file.php/12/images-and-videos.html
... but the mpg file did not play 
The key to solving that problem was to ensure the media plugin was installed (check there is a "mediapugin" folder in Moodle's "filters" folder) and then enable it (from the site's front page, choose Configuration->Filters, then move "Multimedia Plugins" to the "Active" list)
I was then able to view the video clip 
Next, I used Tom's HotPot module (not the most recent one) to add the quiz to the course as a "Hot Potatoes Quiz". Both the image and the video clip displayed wihtout a hitch. Here's the quiz:
http://bateson.kanazawa-gu.ac.jp/moodle/mod/hotpot/view.php?id=97
hope this helps, and if you have time to report back to this thread on what happened, I would be very interested to read about it
