Open the page in DW. Insert the image. Select the image in DW's Design view. Use the Folder icon on the Property inspector to browse to and select the desired target location.
First, define your local site in Dreamweaver. Site > Manage Sites > New.
Without this critical first step, DW cannot manage links and assets for you.
To Make an Image into a Hyperlink:
NOTE: You cannot make a hyperlink out of a background image.
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