You can pass the "ghosted drag image" as the "avatar" when you call DragDropManager.startDrag(). The avatar is what follows the mouse while you're dragging.
The format is what actually gets passed bettween the drag source and the drop target. This may be the same as the avatar, or it may be something more data-centric, like the data for a list item.
Usually, if you're simply dragging a display object around (that has no data associated with it like a list item would), you could add the display object itself as the drag data. Something like this is probably fine:
var dragData:DragData = new DragData();
In this case, I randomly called the format "display-object-drag-format", but call it whatever you want. It just needs to be a string that both sides (the drag source and the drop target) agree on.
Then in your DragDropEvent.DRAG_ENTER listener, you can check for that format:
In the DragDropEvent.DRAG_DROP listener, you use dragData.getDataForFormat() with the same string to retrieve the display object or other data.