The file:/// is the reason the images are not showing up. That means it's looking on your hard drive. If this file you are working with is in a defined site make sure when you copy in the image path you are copying the address into the "URL" field at the bottom of the window and not the "file name" field closer to the OK button. Also make sure that there is not a leading "/" to confuse DW and make it think the file is on your computer.
But my URL field/<img src=""> field never have anything besides absolute defined images. Here's an example of my image source set up:
<img src="http://www.host.com/folder/email/image.jpg" width="175" height="245" border="0" />
Can we see a screenshot of the page in DW and possibly live code?
Also if it's happening only on your installation, it could be corruption or something wrong on your computer. You could try #4 and #12 from the following FAQ (and yes I am aware the FAQ is unrelated, but it's the quickest way I know to find those links) http://kb2.adobe.com/cps/405/kb405604.html .Or you may have to consider creating a new user account, or re-installing the app.
I'd recommend trying it in that order to see what's going on. It's a strange problem I've honestly never come across before and on my local copy I don't know how to duplicate the issue which makes me think more towards corruption vs a bug.
Here's a screenshot example of exactly what I'm seeing: https://picasaweb.google.com/112443292201335606205/DreamweaverBorked#5664528707522257314
If you don't see anything wrong with the screenshot, I'll have to talk to my company about reinstalling Dreamweaver. I do appreciate all the advice you've given me so far!
Picasa says "Picture not found".
One of our team members is having exactly the same problem.
To make things more mysterious, no one else on the team is having the problem, and we're all using the same Dreamweaver Defined Site!
I found the answer at: http://forums.adobe.com/message/1029863#1029863
Under the VIEW menu check "Display External Files" and restart Dreamweaver.
That solved the mystery for us ... mostly. 5 of the 6 images registered, but leaving one unfixed. Maybe another restart...