On Mac Snow Leopard, I have a test server set up and have my preferences set for Links relative to Site Root.
Browsers hit the site just fine using the local IP address and the site folder: http://192.168.1.104/thesite/ which is set for the Web URL in Dreamweaver's server settings for the Test server. I use the browse button to select the Server Folder and it installs /Library/WebServer/Documents/thesite
When I click Save in the server settings, I get a message that "the URL prefix "/thesite/" of your testing server does not match the URL prefix "/" of your site". Huh?
Of course, all the links generated by Dreamweaver need manual revision to work. If I remove thesite/ from the site folder entry I don't get the message, but then previewed pages lack the site folder in the attempted preview in the browser.