on line 168 of cupcakes.php you want to replace
<?php echo $row_rsCupcakes['IMAGE']; ?>
<img src="<?php echo $row_rsCupcakes['IMAGE']; ?>" alt="some alt text" />
you can do this via Insert->Image, and choose to select file name from data sources, where you add the field with the path to your image.
Ensure your alt text is meaningful, (it helps seo) and if your images are all in a folder, (such as images), then you may need to add the folder path to the beginning of the source string