It doesn't support Hardware Handshake. Either none or Xon/Xoff which is software handshake. You could probably try that, I'm not exactly sure on how Xon/Xoff works. But HSK requires CTS/RTS lines, it's not supported by the other machine, so...I'd probably have to pick up a DE-9 (it's not DB-9) RS232 tester and see if the CTS/RTS lines blip the LEDs when I use software handshake.
I've now got both MacTerminal 1.1 and 2.2 on disks. With 1.1 I tried selecting Xon/Xoff, but using TeraTerm on the PC, when I set it to use Xon/Xoff it wouldn't allow me to send files via Xmodem.
I have MacTerminal 2.2 here and it looks exactly the same. However, instead of just offering XModem and Text file transfer (I will investigate the Text anamoly you found and see if it is "fixed" in MacTerminal 2.2 or 2.3.1), it has MacBinary, XModem Text, MacTerminal 1.1, Text and "Straight XModem".
Yes, this does look good, although you would need to send the files using MacTerminal at the other end. I'm going to try this with Basilisk II. I'll run MacTerminal in Basilisk II on the pc with serial port connected to the physical Mac 512k, it should work.
EDIT: BTW what is your xfer speed set to?
I set it to 19200 at both ends, with that I got around 630 bytes/sec. When set to 9600 at both ends I get around 600 bytes/sec.
All in all, I'm happy with this solution, it's an easy way of getting stuff to the Mac without a bridge machine.