I’m just curious how I get Windows to use the high quality cursor when dragging and dropping in my WPF application. What I mean by high quality is:

Rather than the regular arrow with a rectangle. I tried using e.Effect but that didn’t do anything… Am I doing something wrong? Or is this just how it is in WPF.
you can’t use the cursor to do this, cursors are MOUSE POINTERS.
want you are looking for are Adorners
here is the doc on this subject:
http://msdn.microsoft.com/en-us/library/ms743737.aspx
and here is a very complete tuto on how to use drag & drop in WPF:
http://blogs.msdn.com/b/jaimer/archive/2007/07/12/drag-drop-in-wpf-explained-end-to-end.aspx
Edit: just to be precise: to achieve exactly what is shown on your image, you would in this case need an Adorner that follows the mouse + a blank cursor:
this.Cursor = Cursors.None;