Here is a screenshot of the cursor problem. In the layout window, the cursor is
"... that |it's...". In the source window, the cursor is "... that i|t's...".
If I type something, it shows up between the i and the t, even though the
layout window shows the cursor before the i.

http://www.languagegeek.com/misc/DW_...Placement.tiff

The issue has gone away for me. I think it had to do something with my font
preferences. I can see from your screenshot that you are using Lucida. Try
using these fonts instead:

Proportional font - Times New Roman - 12 pt
Fixed Font - Monaco - 10pt
Code View - Monaco - 7pt