For others who may have this issue, I found out the problem was due to flash operating outside of the current session instance. The entire site is password protected with forms authentication, so when flash tried to call the url to upload, it was being redirected to the login page. Silverlight apparently stays within the current context so it's authenticated. Adding this opens it up so it works:
<location path="CuteSoft_Client/CuteEditor/Uploader.ashx">
<system.web>
<authorization>
<allow users="*"/>
</authorization>
</system.web>
</location>
The downside of course is that now anyone can upload files to the server.