There was an issue in QC10 where an invalid server response was received with similar errors when downloading the workflow scripts to the td80 directory in temp. The error was caused by the HTTP compression which is used by the client to improve performance.
The fix was to disable HTTP compression by adding the parameter below to Site Administration Site Configuration parameters list
**DISABLE_HTTP_COMPRESSION, set the value to Y**
Not sure whether service needs to be restarted, but restart it to be sure the change is in.
The error was a bit different, but I would give it a try.
Also make sure you have write permissions to the temp directory where the td80 directory lives.
Another possible cause is the proxy configuration of the browser.
Could also be that the User Quota for the project is limited, you can set to unlimited on the **Site Projects** tab in Site Administrator for each project. Check that setting to see if it is limited or not.