I've looked up the version number in the properties of the cuteeditor.dll and we're using v5.0.
I've set up a test app, webapplication1 according to your simple instructions, and placed cuteeditor directly under that project, and I get the same error. Text that has been formatted once can't be formatted again (unless you change what you're highlighting).
I've also noticed another funny thing. The error appears when I run IE6, however when I try it with Mozilla Firefox 1.0.7 it works just fine.
I'll see if we can publish some kind of public example for you to access, but I'll get back to you with that.
Regards,
Daniel