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Bug reports without an attached log file are usually useless.
%1% with double-quotes too. See:
C:\Users\shrimants\TEST>dir /s /b
C:\Users\shrimants\TEST\batch.bat
C:\Users\shrimants\TEST\filelist.tmp
C:\Users\shrimants\TEST\testscript (1).txt
C:\Users\shrimants\TEST\testscript (2).txt
C:\Users\shrimants\TEST\testscript (3).txt
C:\Users\shrimants\TEST\testscript (4).txt
C:\Users\shrimants\TEST\testscript (5).txt
C:\Users\shrimants\TEST\testscript (6).txt
C:\Users\shrimants\TEST\testscript.winscp
C:\Users\shrimants\TEST>"c:\Program Files (x86)\WinSCP\WinSCP.com" /script=tests
cript.winscp /parameter 'testscript (1).txt'
batch abort
confirm off
Searching for host...
Connecting to host...
Authenticating...
Using username "shrimant".
Authenticating with pre-entered password.
Authenticated.
Starting the session...
Reading remote directory...
Session started.
Active session: [1] shrimant@login.umd.umich.edu
C:\Users\shrimants\TEST
/home/user/s/h/shrimant/TEST
transfer binary
File or folder ''testscript' does not exist.
System Error. Code: 2.
The system cannot find the file specified
(A)bort, (R)etry, (S)kip, Ski(p) all: Abort
C:\Users\shrimants\TEST>"c:\Program Files (x86)\WinSCP\WinSCP.com" /script=tests
cript.winscp /parameter "testscript (1).txt"
batch abort
confirm off
Searching for host...
Connecting to host...
Authenticating...
Using username "shrimant".
Authenticating with pre-entered password.
Authenticated.
Starting the session...
Reading remote directory...
Session started.
Active session: [1] shrimant@login.umd.umich.edu
C:\Users\shrimants\TEST
/home/user/s/h/shrimant/TEST
transfer binary
File or folder 'testscript' does not exist.
System Error. Code: 2.
The system cannot find the file specified
(A)bort, (R)etry, (S)kip, Ski(p) all: Abort