I just figured this out (well, I think I did)...but first a disclaimer: I am not a flash developer, this is only the second time I've done anything with flash so if my code is bad or whatever, don't complain...just tell me how to do it correctly!
In the DrawUtil class there is a function called hollowRectangle which takes an extra parameter that it uses to "cut the hole." The code drawing the frame is in the setSize function of the Image class. Toward the bottom inside the if (mLoaded) part is a call to DrawUtil.rectangle. That call needs to be replaced by DrawUtil.hollowRectangle and you'll need to pass in your frame width (I know there's a variable set for that but mine is just hard coded.
Here is the original line from Image.as:
Here is the replacement (the '10' at the end is the frame width):
DrawUtil.hollowRectangle(mFrame_mc, 0, 0, mWidth, mHeight, 10);
I also made a change to make the image transparent instead of just darker when it's not the one "in focus" which I will post shortly.
Here's the example: