I've never done that myself but i suppose that one solution would be to
create a Bitmap containg whatever you want to display as the mouse pointer
and set your cursor to be that Bitmap whenever you start dragging:
this.Cursor = new Cursor(cursorBitmap.GetHicon());

It only works with B&W bitmap though (transparency is supported) and the
cursor hot spot is always located at the center of your bitmap so you need
to take that into account when creating it. If you want to do fancier
things, you'll have to look at the CreateCursor API instead.