Figured it out - if you open up the ZIP file with something like "textedit" on the mac.

You'll notice at the beginning of the file there is a PHP warning message that talks about "headers already being sent" and the output buffer.

This sits right above all the encoded ASCII character stuff.

Delete the portions that say:
<br />
<b>Warning</b>: mkdir() [<a href='function.mkdir'>function.mkdir</a>]: Permission denied in <b>/home/webextre/public_html/includes/modules/pages/download/header_php.php</b> on line <b>132</b><br />
<br />
<b>Warning</b>: Cannot modify header information - headers already sent by (output started at /home/webextre/public_html/includes/modules/pages/download/header_php.php:132) in <b>/home/webextre/public_html/includes/modules/pages/download/header_php.php</b> on line <b>146</b><br />

Delete those lines and make sure there are no blank spaces at the top of the file.
The first column of the first row should start with the encoded characters.

Once this is done - save the file... don't do "save as" - just do "save" - quit TextEdit - now the ZIP file will behave correctly.

To the Developer:

On your download page or somewhere in the header even you need to put:

<? ob_start(); ?>

This starts output buffering and allows multiple headers to be requested. For example your website sends out header information and then when you click download it uses header information again to initiate the file download... this sometimes causes a warning to trip in PHP as described in the block of code that I said to remove from the ZIP file.