OK..Finally it worked. I had to set  AutoUseSystemTempFolder="false. It started using the UploaderTemp folder. Then I had to grant access to UploaderTemp (ASPNET Machine account access). It works fine now.

 

                    <CuteWebUI:Uploader runat="server" ID="Uploader1" InsertText="Upload Multiple Files (Max 10M)" MultipleFilesUpload="true" AutoUseSystemTempFolder="false" TempDirectory="UploaderTemp">