The issue is that when a user who has been chrooted logs in, he cannot edit any file in the site root (which is his user root). A non-chrooted user can edit the same file without issue. The chrooted user can even copy the file to his system without issue, but when he attempts to edit the file the error:
"A call to an OS function failed" happens. I'm almost certain this error is because the temporary path that winscp attempts to copy the file contains "\\".
This happens for all files in the root dir, regardless of type.
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Let me know if you need more details. And thanks for a great proggy!
PS. When you get a chance please make the close button on the connecting dialog actually respond to a click :)