I've run into the same problem. Here is a sample project showing this.

http://cutesoft.net/forum_uploads/CuteEditorGridViewBug.zip

Run the project, and click the edit button. The Cute Editor control does not load with the JS exception :
Error: CuteEditorInitialize is not defined
Source File: http://localhost:1770/
Line: 1

If the Update Panel is removed it works fine.

Using .NET 2.0,  AJAX 1.0 (v1.0.61025.0), CuteEditor 6.0.0.0
Browser: IE 6 OR Firefox 2.0