Thanks for responding. Perhaps you might try to create a zip file with folders and files enclosed and see if you can download it and extract it to see if it works for you.
Here's what I am doing. I am a .NET programming instructor. Whenever a .NET project is created there are 7 folders with files sprinkled througout in the complete solution/project. In Windows XP or Windows Vista I go to the top folder (.NET Solution folder), right click, and select Send to .. Compressed Folder. This is the standard way of zipping files in Windows and I do this all the time.
Then in Moodle I choose Add a Resource ..., then Link to a File or Web Site, and then upload the zip file I created. At this point it would not make sense to unzip the solution because I want my students to get all of the files and folders.
Finally, when I download it and try to extract it, it fails. I will try a few other experiments today.