When I tried my first steps with swing & xith for the first time it was not working but after that I set any bounds of any object - that is all parent objects of your internal frame should have them set also.
If that does not help you may try a simpler example without internal frames and desktop pane. A simple jpanel should work (maybe add a label also).
PS: I remember not having success when trying to move internal frames on the UIOverlay. Event handling is not as expected (the canvas always want to be the receiver/originator of events - had a hard time when making a workaround for textfields WITH real working eventlisteners - thread Prob with Xith, Swing, textfield + listeners http://www.java-gaming.org/cgi-bin/JGNetForums/YaBB.cgi?board=xith3d;action=display;num=1079039524
). The other way around seems easier (Xith within swing gui: see thread "Xith and Swing ")
BTW: as far as I know show and setVisible are equal (though show is deprecated).