I have now, not realising that that was necessary. But the file now uploads as a "multimedia" file and is not unzipped on the server as it is with the old uploader?
Interesting I will shoot Michael an email but it may be that with the flash uploader that zip uploads are not allowed. The zip uploader can only upload filetypes you specify. Now as a result it the image is not there it cant be uploaded. Now to make it upload with a flash uploader you have to add it to the multimedia types and if you do then it does not process as a zip so the short answer is this option might not work with flash uploads.