Does your Picturebox have its OLEDropMode set to something other than none? Only reason I can think of why it would draw the VB arrow on top of the normal drag image /cursor. Also drag it on to other modern programs and see if it appears there too, if it does there won't be anything you can do.

The DROPEFFECT refers to move, copy, and link... if you didn't do any of those actions, you don't have a drop effect to report.