http://members.dslextreme.com/users/tony23/drag.htm

In this case there is no parent/child relationship between the divs. The
mouseover event does not fire on the yellow divs if you mousedown first on the
blue div with overflow:auto.

The blank blue DIV has overflow: auto but no text. If it's any help, in Firefox
2.0, a mousedown in this div would not cause the mouseovers to fail. However,
as of the latest build, it does.

I am still able to replicate this bug as of May 2, 2007:
Mozilla/5.0 (Windows; U; Windows NT 5.1; en-US; rv:1.9a5pre) Gecko/20070502
SeaMonkey/1.5a

For another example, please see

Additional test case:
http://members.dslextreme.com/users/tony23/scrollx.htm

Container div is overflow:hidden. The 'floating' div that appears when you
mousedown indicates the ID of the div firing the mouseover event.

Mouse down on the list, then drag down: Hidden divs within the container div
are firing the mouseover event when mousing over their position, were they
visible. Mouseover events outside the container div do not fire.

This occurs for all overflow options except 'visible', and also occurs if
either overflow-x or overflow-y are set to anything other than 'visible'

I think I may have narrowed it down further. I found in an application of my
own which was exhibiting this behaviour, that if you run .preventDefault() on
the mousedown event after it has fired, then this allows other events to start
up. I'm not sure why this would be effective, but the mousedown appears to be
trapping the browser context within the overflow scope.

I can confirm this bug. I had an element with overflow: hidden; and when
starting dragging inside that element, mouseover was not triggered on other
elements.

Created an attachment (id=298265) [details]
Testcase

I would like to add that I have user agent: Mozilla/5.0 (Windows; U; Windows NT
5.1; en-US; rv:1.8.1.11) Gecko/20071127 Firefox/2.0.0.11

I've attached a testcase demonstrating the issue, should the aforementioned
testcases disappear.

Created an attachment (id=325671) [details]
Testcase 2

I've also run into this bug.  Here are the details, and a testcase to
illustrate them.  When you click and drag on a div that 

a) is contained within a div with overflow:auto or overflow:hidden
b) has text in it and whitespace next to the text
c) has a mousedown handler that calls preventDefault (to prevent selection of
the text)

When you drag the mouse outside of the overflow:auto div, if you clicked on the
whitespace, mouseover events continue to fire with the target as the
overflow:auto div, instead of the node that the mouse is currently over.  Note
that the overflow:auto div /does/ in fact receive a mouseout event (visible
occasionally in the attached case as a brief flash of white).  However, if you
drag from the text, everything works as you would expect.

In the testcase, try clicking and dragging from "One" or "Two", dragging
variously from the text or the whitespace to the right of the text.  If you
drag from the whitespace, the outer div (with overflow: auto) will continue to
be yellow no matter where you drag outside of it.  This doesn't happen if you
drag from the text, or if you drag from "Three" or "Four".  

Note that this works the same if #outer has overflow:hidden instead of
overflow:auto