> Am I reading this right that people can (and do??) use images as a complete replacement for source code files?

Images are not replacements of source code files. Images are used in addition to source code files. Source code is checked in. Images are created and shipped. The image lets you debug things live if you've got to. You can introspect, live debug, live patch and do all the shenanigans. But if you're making fixes, you'd make the changes in source code, check it in, build a new image and ship that.