jQuery code that won't work with Drupal 7

Hello,
Another newbie question from me I'm afraid....

I am including some javascript in my module:

drupal_add_js(drupal_get_path('module', 'mymodule') .'/myInclude.js');

And generally its all working fine...

However I'm now trying to add a dynamically generated modal dialog as per this example here:

http://jsfiddle.net/sje397/HRJBs/

So, my code would look like this:

(note: I've cut the code back to just what I am having trouble with)

(function ($) {
var diag = $('<div id="myDialog" title="Testing!"><span id="dialogMsg"></span></div>');

diag.dialog({
    autoOpen: false,
    modal: true
});

$('#diag1').click(function() {
    $('#dialogMsg').text("Message for dialog 1.");
    diag.dialog("open");
});

}(jQuery));

Now, when I try to run that code.. I get an error in the Chrome browser on the 'diag.dialog(' line as follows:

Uncaught TypeError: undefined is not a function

So, I'm wondering why this code works just fine in jsfiddle but not in Drupal.

I checked that it was ok with jQuery 1.4.4 ... and in jsfiddle the jQuery UI version is 1.8.5

I think it might be to do with the way you have to surround jquery code with the

(function ($) {
...
}(jQuery));

But I'm not sure what I have to do to fix it...
Any help would be greatly appreciated..

Vida

PS: can anyone tell me how to get these forms to email me to let me know there has been a reply to my post?