ADDITIONAL INFORMATION
Usually I use A.T. in SSH-2 mode for the security. However, not long ago I decided to try an experiment. Rather than login to my shell host with SSH-2, I tried straight TELNET. Now I got some different results.
I was able to download large files with Zmodem in both Ascii (almost 1M

and binary (>700K

modes correctly. One was a PDF (binary) and the other was a UUENCODE (Ascii) of that same file. Both were received on my Win98 machine correctly. The Ascii file UUDECODEd correctly, and both versions of the PDF were good. So there is a first impression that somehow SSH-2 as such may be involved.
There is still the erroneous message about the download directory being missing, even though it isn't. I have to go through the directory browse and select it, and even then the download process still squawks. I have to go through that a time or two and then Cancel, and the download starts. I don't know what is going on here.
HOWEVER, I cannot upload successfully in TELNET mode, either Ascii or binary. I start 'rz -a[b]' on the shell host. Then I get the usual browse box to select the file. I select the file, and the browse box pops up again. I select the file a second time, and then the upload supposedly starts. But within just a second or two the Zmodem progress window closes, some gibberish shows up on the shell host, and I have to ^C out to interrupt.
So at least there is something else involved. I can download in TELNET mode but not in SSH-2. I can upload small files in SSH-2 but cannot upload large files in SSH-2 or anything in TELNET. (I do want to be able to use SSH-2 for the security.)
Finally, as I have mentioned before, there seems to be a visual glitch in the Zmodem window. It appears that the "Packets Transmitted" label is truncated.