I am trying to add materials for my 3d models but the drag and drop doesn't appear to be working for TGA files. I converted them to PNG and drag and drop works fine.

It says here that TGA should be supported.
Image - Wiki Link

Any suggestions as to why this is the case?

DX9 version supports it, but in DX10+ they (Microsoft DX SDK team) somehow removed it from support.
I'll add this to roadmap, to support tga in dx10+

Thanks, yep that was it.

Should save me a lot of time converting now

Well you could simply make the dx10 editor run the dx9 converter.exe for tga files.