I have this problem as well. Whatever I do, the temp files are put in the Windows temp folder, and I get the error that the upload handler can't find the file in the windows temp folder. As that is on the C drive and my web stuff on the E drive, I wan't to change this parameter. I have set it both in the calling script and in the upload handler.
$uploader=new PhpUploader();
$uploader->Name="mediaUploader";
$uploader->MaxSizeKB=800000;
$uploader->MultipleFilesUpload=true;
$uploader->CancelUploadMsg="Avbryt";
$uploader->CancelAllMsg="Avbryt alla";
$uploader->InsertText="Ladda upp filer";
$uploader->ShowProgressInfo=true;
$uploader->NumFilesShowCancelAll=2000;
$uploader->ProgressBarHeight=15;
$uploader->ProgressPanelWidth=260;
$uploader->ProgressInfoStyle="padding:3px; font:normal 9px Tahoma;";
$uploader->ProgressTextTemplate="\r\nFil: %F% \r\nHittils: %P% %SEND% av totalt %SIZE%, %T% sekunder kvar.\r\n";
$uploader->AllowedFileExtensions="png,gif,jpeg,jpg,wav";
$uploader->TempDirectory = "e:\\htdocs\\www\\temp\\musicbase\\";
Note that I have tried giving the folder name using single backslashes, forward slashes and omitting the drive letter with the same result. Below is the result screen I get.