To locate images in the template, right click an image in your browser, and choose Inspect (in chrome. Something similar in other browsers). This will show you the path to the image. The path on the server will generally reflect the path in the browser. If not, check for a .htaccess-file in your site root, to see if there are directives redirecting the images folder path.
Also: Don't try to upgrade your joomla 1.0 to joomla 3 (regardless of what others here are saying): You will end up using a lot of time making your old, outdated design work in joomla 3. Also you will have all sorts of issues with your data. Still: Consider that Joomla 1.0 is will give you all sorts of troubles, so if you are serious with the website, assess the best way to migrate to a modern platform. Joomla 3 is a good alternative, but also consider other systems, depending on your competence. The normal migration route for Joomla will not work well with such an old site, so you'll anyway have to find a way to move the data you want to keep (...and skip old outdated data you dont need anymore!)