Ok trying to do a quick catch up here since I was to busy at work.
IF the brush files you see in the folders that are not showing up are only .JBR files the newer versions of PSP will not recognize them.
The newer versions from 8 up I believe need the two parts of the brushes.
Here is a link to
Suz's site #088 that walks you through changing the .jbr brushes to work in PSP8 and up.
088 Using Custom Brushes in PSP X2
To use .jbr brushes in any version of PSP from PSP 8 on, they must be converted to PspScript/PspBrush format. To do this:
Choose File...Import...Custom Brush
On the Import Custom Brush dialog, click Open, and browse to the folder that contains the custom brush. This will open the brush file, and you'll see all the brushes in that file in the left hand window.
Click the Add All button - all the brushes will move to the right window.
Click the OK button, and the brushes will be added to the "save to folder" designated in your Preferences...File Locations.
Custom brushes have two parts - a PspBrush file, which contains an image defining the shape of the custom brush, and a PspScript file, which defines the settings in the Tool Options and Variance palettes for the brush. These files are in the following format:
BrushTip_xxxxxx.PspScript
xxxxxx.PspBrush
where xxxxxx is the name the user chose for the brush.
Both parts are essential to using a brush in PSP. Occasionally, one of these two parts gets lost, with these results:
If the PspScript file gets lost, the brush will not appear in the list of brushes. You can recreate the script file by moving the PspBrush file out of the Brushes paths as defined in File Locations and importing the brush again.
If the PspBrush file gets lost, the brush will appear in the list of brushes as a big blob. If you cannot find the associated PspBrush file, you will need to delete the PspScript file and re-import the brush from the original .jbr file.
Ok that should fix your brushes not showing up in the dropdown menu!

If they are indeed .jbr files to begin with.
Having the zip files in there shouldn't be a problem as I have zip files in my Restricted Scripts folder...
You wrote: "Can't do this. When I do #2 to open the Create Brush Tip Dialog Box- the brush preview shows whatever brush was previously selected and not the brush/image I am trying to create. "
Ok let me try to explain...
when you are using this method your brush image can only be ONE layer and can have a selection, whether it is of the whole image or just a part withing in the image. I just got mine to recreate what you are explaining about it still showing the last brush in the preview window. So make sure that your image is only 1 Layer.
If this doesn't fix it for you, contact me on Hello tomorrow as I am home all day: Haley64