Since you're already using jQuery, why not use jQuery UI's draggable component? This way, you don't have to deal with all the mouse down calculations. I switched your site's code to use jQuery UI's draggable functionality and it was pretty quick and required a lot less code.
Here's the code I used:
<!DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd">
<html xmlns="http://www.w3.org/1999/xhtml">
<head>
<meta http-equiv="Content-Type" content="text/html; charset=utf-8" />
<title>jQuery Drag and drop</title>
<style type="text/css">
#dv {
position: absolute;
cursor: move;
}
</style>
<script type="text/javascript" src="http://code.jquery.com/jquery-1.4.2.min.js"></script>
<script type="text/javascript" src="http://ajax.googleapis.com/ajax/libs/jqueryui/1.8.2/jquery-ui.min.js"></script>
<script language="javascript">
$(document).ready(function() {
$("#dv").draggable({
cursor: 'crosshair'
});
});
</script>
</head>
<body>
<div id="dv" style="position:absolute;left:300px;top:200px;">
<img src="http://www.mejoyal.com/jquery/drupal.png" />
</div>
</div>
</body>
</html>
Hope this helps!!