I assume that you mean that the little drag bar disappears and that items aren't inserted on drop. This is (unfortunately) expected behavior. If you register for Drag Over, Drop, or really any of the other drag and drop events on a target then the default behavior provided by LabVIEW is never executed.
I struggled with this quite a bit when I was implementing Drag and Drop as a feature in LabVIEW 8.0.... The problem is, that if you accept some datatype that the tree/listbox/string/ whatever doesn't know about, it won't know how to draw the feedback. Also, on the Drop event specifically, there is not a way currently for LabVIEW to know if you handled the event (by inserting the item) or if LabVIEW should do the insertion. Similar issues can arise if you draw your own feedback for drag drop. Therefore, the rule (for now) is that if you register for any drop target event (Drag Over, Drag Enter, or Drop) that you must implement all the drag and drop behavior yourself.
I welcome any feedback on this. This is actually a big interest of mine to revisit the drag drop events and restore some default behavior when possible or at least provide an intuitive way to mimic default behavior.
Jeff P
LabVIEW R & D