Do you mean by setup external zip to change the file extension to a zip file and upload that way? I am getting a different error message when I try that. I am searching Moodle forums now for any more info on changing the extension to zip.
I am gathering it has something to do with changing the xml files in the zip file somehow, but that is as far as I have gotten. It not clear to me yet what I should do with those files.
We merged from 1.9 and the courses came over fine, but now some won't backup and restore while others will restore correctly. If it is something within the course causing problems I could remove that from the course before trying to restore. I think it might have to do with autolinking or the glossary.