Big thanks to RobM for pointing me in the right direction. Using the other SO answer you provided, and the tutorial link you provided, here is a solution working for me in FF and chrome 
(See fiddle: http://jsfiddle.net/MWe8U/)
HTML
Content Editable Div:
        <div id='d' class='demo' contenteditable='true'>
        </div>
CSS
.demo{
    height:400px;
    border:1px solid black;
    overflow-y:scroll;
}
JS
        $(document).ready(function() {
            var handleDrag = function(e) {
                //kill any default behavior
                e.stopPropagation();
                e.preventDefault();
            };
            var handleDrop = function(e) {
                //kill any default behavior
                e.stopPropagation();
                e.preventDefault();
                //console.log(e);
                //get x and y coordinates of the dropped item
                x = e.clientX;
                y = e.clientY;
                //drops are treated as multiple files. Only dealing with single files right now, so assume its the first object you're interested in
                var file = e.dataTransfer.files[0];
                //don't try to mess with non-image files
                if (file.type.match('image.*')) {
                    //then we have an image,
                    //we have a file handle, need to read it with file reader!
                    var reader = new FileReader();
                    // Closure to capture the file information.
                    reader.onload = (function(theFile) {
                        //get the data uri
                        var dataURI = theFile.target.result;
                        //make a new image element with the dataURI as the source
                        var img = document.createElement("img");
                        img.src = dataURI;
                        //Insert the image at the carat
                        // Try the standards-based way first. This works in FF
                        if (document.caretPositionFromPoint) {
                            var pos = document.caretPositionFromPoint(x, y);
                            range = document.createRange();
                            range.setStart(pos.offsetNode, pos.offset);
                            range.collapse();
                            range.insertNode(img);
                        }
                        // Next, the WebKit way. This works in Chrome.
                        else if (document.caretRangeFromPoint) {
                            range = document.caretRangeFromPoint(x, y);
                            range.insertNode(img);
                        }
                        else
                        {
                            //not supporting IE right now.
                            console.log('could not find carat');
                        }
                    });
                    //this reads in the file, and the onload event triggers, which adds the image to the div at the carat
                    reader.readAsDataURL(file);
                }
            };
            var dropZone = document.getElementById('d');
            dropZone.addEventListener('dragover', handleDrag, false);
            dropZone.addEventListener('drop', handleDrop, false);
        });