Michael Gardi reported dropped characters, even though software flow control using XON and XOFF was enabled. As a heavy Emacs user, I abhor XON/XOFF since XOFF is the same as Control-S which is search in Emacs. But still if you enable it, it should certainly work!
Looking into this, true enough the VT100 does send an XOFF when it's being overwhelmed. But the remote side didn't seem to care about this and kept sending data to the terminal. Why that is, I don't know! My best guess at this point is that there may be a operating system buffer still emptying even though the host received the XOFF and stopped sending characters.
Rather than banging my head against that wall, I applied a quick band aid. The simulator will now intercept XON/XOFF internally and do the flow control. It's not pretty, but it seems to work. Maybe there will be a better solution in the future.