Worth a try if some of you others are still experiencing it.
"Appears that dragmode don't work at all in the 'ON' state."
Maybe you already know this, but AutoCAD Help states that when DRAGMODE is set to "On" (1), this "Permits dragging, but you must enter drag where appropriate in a drawing or editing command to initiate dragging."
"...other wise I'm having the same problem."
Have you tried (or do you plan to try) a graphics driver upgrade?