Yes you need to replace the "media" with the actual location of the image. By default all images in a ShopSite store are placed in the "media" directory but that can be changed by the host at install time.
Note that I just put the image name listed in page.field1 as the alt text so that is why you saw the image name and not the image itself. Since the image couldn't be displayed the alt text was.
Looking at the source of the page the image that moves (LOGO_FINAL!.PNG has a class assigned to it (class="link_image"). So what you need to do is apply that class to the other images.
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<a href="[-- OUTPUT_DIRECTORY_URL --]/[-- PAGE.FileName --]" ><img src="[-- OUTPUT_DIRECTORY_URL --]/media/[-- page.field1 --]" alt="[-- page.field1 --]" >
becomes
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<a href="[-- OUTPUT_DIRECTORY_URL --]/[-- PAGE.FileName --]" ><img class="link_image" src="[-- OUTPUT_DIRECTORY_URL --]/media/[-- page.field1 --]" alt="[-- page.field1 --]" >
As a side note since you are modifying the template you could remove the comments about it being depreciated
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<!--
THIS TEMPLATE IS DEPRICATED AND IS NO LONGER MAINTAINED
The Awesome Orange templates now support multiple color
schemes, and should be used instead of this template.
-->