zmodem - what type of protocol is it..? layer 3 or layer 4 ? more...

zmodem is a serial file transfer protocl and as such is completely separate from networking protocols. It was originally delevloped as a replacement for xmodem, which in turn was developed as an alternative to kermit. All of these are a means of copying files over a simple serial connection like you'd have in the case of a direct modem dial-up directly to a remote server. They were very popular and widely used before the days of dial-up networking and are quite efficient over low speed dial-up connections (<9600baud).

The most appropriate way to transfer files between a remote client and a remote server that only offers ssh access is to use scp. The putty client for windows (http://www.chiark.greenend.org.uk/~sgtatham/putty/) includes a command line scp program and there are Gui clients for windows like WinSCP (http://winscp.vse.cz/eng/).

so how does zmodem relate to firewall rules...?
As since I am using SSH2 to telnet, when I use zmodem to transfer or put files in the server, is it tunnelled through SSH (TCP/port 22)?

The short answer is that it doesn't. The firewall controls the ability to connect various addresses and ports through it, generally it doesn't look at the contents of the packets passed through it. zmodem is an application to application protocol not a comms protocol.