By "working" I assume you mean compilable, since if it was "working" I
wouldn't need to ask here {:v)

The "littleducky.gif" mentioned in JSourcePanel is a 16x16 non-transparent
GIF. I originally used a bigger image, but it occurred to me that perhaps
the drag image had to be no bigger than a standard system cursor - hence the
reduction. Assuming that you supply a valid image (I refrain from trying to
include attachments here), note that it renders quite happily in the source
panel on the left, proving that it is loaded OK. The red square in the
source panel is what can be dragged to the right panel, and it should pop up
a message box saying "Why, thankyou!" if you drop it successfully. I only
see the drag cursor, not the image I specify also being dragged as expected.

4 files' worth, each in separate sections:
---
public class JDnDFrame extends JFrame
{
public static void main(String[] args)
{
 JDnDFrame mainFrame ;

 mainFrame = new JDnDFrame();
}

private JDestinationPanel m_destPanel ;
private JSourcePanel  m_sourcePanel ;

public JDnDFrame()
{
 super("TestDnD");
 setBounds(100, 100, 400, 300);
 buildUI();
 setVisible(true);
 addWindowListener(new WindowAdapter()
  {
   public void windowClosing(WindowEvent e)
   {
    onClose();
   }
  }
  );
}

private void onClose()
{
 setVisible(false);
 System.exit(0);
}

private void buildUI()
{
 Container   contentPane ;
 GridBagConstraints gridData ;

 contentPane = getContentPane();
 gridData = new GridBagConstraints();
 if (contentPane != null && gridData != null)
 {
  contentPane.setLayout(new GridBagLayout() );
  contentPane.setBackground(new Color(192, 192, 192) );

  gridData.fill = GridBagConstraints.BOTH ;
  gridData.insets = new Insets(8, 8, 8, 8);
  gridData.weightx = 0.5 ;
  gridData.weighty = 1.0 ;

  gridData.gridx = 0 ;
  gridData.gridy = 0 ;
  m_sourcePanel = new JSourcePanel();
  contentPane.add(m_sourcePanel, gridData);

  gridData.gridx = 1 ;
  gridData.gridy = 0 ;
  m_destPanel = new JDestinationPanel();
  contentPane.add(m_destPanel, gridData);

  m_sourcePanel.add(m_sourcePanel.getDragPanel() );
 }
}

}

---
public class JSourcePanel extends JPanel implements DragGestureListener,
            DragSourceListener
{
private ImageIcon m_dragImage ;
private JDragPanel m_dragPanel ;

public JSourcePanel()
{
 DragSource dragSource ;

 m_dragImage = new ImageIcon("littleducky.gif");
 m_dragPanel = new JDragPanel();

 setBackground(new Color(0, 0, 0) );
 setPreferredSize(new Dimension(150, 100) );

 dragSource = DragSource.getDefaultDragSource();
 dragSource.createDefaultDragGestureRecognizer(this,
DnDConstants.ACTION_MOVE,
             this);
}

public void paintComponent(Graphics g)
{
 super.paintComponent(g);

 g.setColor(new Color(255, 255, 255) );
 g.drawString("Source", 50, 50);

// Prove that the image is loaded OK by rendering it manually.
 g.drawImage(m_dragImage.getImage(), 10, 10, new Color(0, 0, 0), this);
}

public JDragPanel getDragPanel()
{
 return m_dragPanel ;
}

public void dragGestureRecognized(DragGestureEvent e)
{
 Image x = m_dragImage.getImage();
 // This was used to verify that the image was valid by examining 'x' in
Eclipse.

 try
 {
   // This is where the image passed seems to get ignored.
  e.startDrag(DragSource.DefaultMoveDrop, m_dragImage.getImage(),
     new Point(0, 0), m_dragPanel, this);
 }
 catch(InvalidDnDOperationException e2)
 {
  e2.printStackTrace();
 }
}

public void dragDropEnd(DragSourceDropEvent e) {}
public void dragEnter(DragSourceDragEvent e) {}
public void dragExit(DragSourceEvent e) {}
public void dragOver(DragSourceDragEvent e) {}
public void dropActionChanged(DragSourceDragEvent e) {}
}

---
public class JDestinationPanel extends JPanel implements DropTargetListener
{
private DropTarget m_dropTarget ;

public JDestinationPanel()
{
 m_dropTarget = new DropTarget(this, DnDConstants.ACTION_MOVE, this);

 setBackground(new Color(0, 0, 0) );
 setPreferredSize(new Dimension(150, 100) );
}

public void paintComponent(Graphics g)
{
 super.paintComponent(g);

 g.setColor(new Color(255, 255, 255) );
 g.drawString("Destination", 50, 50);
}

public void drop(DropTargetDropEvent e)
{
 DataFlavor  theFlavour ;
 Object   transferredObject ;
 Transferable transferData ;

 try
 {
  theFlavour = JDragPanel.getTheSupportedFlavour();
  transferData = e.getTransferable();
  if (e.isDataFlavorSupported(theFlavour) )
  {
   transferredObject = transferData.getTransferData(theFlavour);
   e.acceptDrop(DnDConstants.ACTION_MOVE);
   e.dropComplete(true);
   JOptionPane.showMessageDialog(this,"Why thankyou!");
         }
         else
         {
            e.rejectDrop();
         }
 }
 catch(IOException e2)
 {
  e2.printStackTrace();
 }
 catch(UnsupportedFlavorException e3)
 {
  e3.printStackTrace();
 }
   }

   public void dragEnter(DropTargetDragEvent e) { }
   public void dragExit(DropTargetEvent e) { }
   public void dragOver(DropTargetDragEvent e) { }
   public void dropActionChanged(DropTargetDragEvent e) { }

}

---
public class JDragPanel extends JPanel implements Transferable
{
private static DataFlavor[] m_supportedFlavours ;

public JDragPanel()
{
 setBackground(new Color(255, 0, 0) );
 setPreferredSize(new Dimension(25, 25) );

 m_supportedFlavours = new DataFlavor[1];
 if (m_supportedFlavours != null)
  m_supportedFlavours[0] = new DataFlavor(getClass(),"JDragPanel");

}

public DataFlavor[] getTransferDataFlavors()
{
 return m_supportedFlavours ;
}

public boolean isDataFlavorSupported(DataFlavor flavour)
{
 return flavour.equals(m_supportedFlavours[0] );
}

public Object getTransferData(DataFlavor flavour) throws
UnsupportedFlavorException, IOException
{
 return this ;
}

public static DataFlavor getTheSupportedFlavour()
{
 return m_supportedFlavours[0];
}

}