disable ai, and see if the normal blizzard frames having the same issues?  just that
i dont touch the onclick event (if i do ai would get blocked) so there shouldnt be
any ai interaction going on for that part.

I know its not Wow itself creating the issue, because I can manipulate the item with 
no addons, or using other bag addons.  I currently use vBagnon, Baggins and 
Arkinventory, each on different toons.  I disabled Ark and it worked, and it works 
with the other two bag addons.  Thanks for the reply, any other thoughts?

The click to drag was just an example.  When I right click to equip the item, it 
doesn't go onto my toon.  I noticed the problem b/c I use Wardrobe 2, for my 
different gear sets.  Each time I want to put on my PvP gear, I realize that she's 
isn't wearing her helm, which is easily visible b/c of the halo over her head and 
the shrouded face.  So I look at the paper doll frame and there's no head piece on, 
it replaces my healing or damage headpiece with nothing.  Then I go to right click 
Merciless Gladiator's Mooncloth Helm, and nothing happens.  The tool tip is there 
showing the item properly, but no matter what I do, AI treats it like the item is in 
my bag, but I can't do anything to it.  I have tried dragging another item from my 
bags to the helm, just to move its spot around in the bags, and nothing happens.  I 
have also changed the category just on that one item, but the problem persists.

if you can pick up the helm and place it into another bag it should mean that ai can
move it around. moving it to your character shouldn't be any different.  can you
disable all the gear/wardrobe mods you've got and see if it works without them? 
there may be a conflict of some sort between it and ai.

if you pick the helm up with your character screen open does the head socket
highlight? ie does the game recognise that the item you've picked up can go in the
head slot?

The game recognizes the head piece if I have it equipped or without AI.  If I use 
AI, I can NOT click the item, nor can I move it.  I can only move the item by going 
into config mode.  That's when I can click the item, and can change its categories.  
The tool tip always works, I'll have to check and see if I can modify the gems and 
sockets when this happens.

rename your ai savedvariables file (to arkinventory.old) and see if that helps?  dont
change anything in ai when you start the game, just try and pick up the helm.