The settings you quote are exactly those I tried with version 6, and it fails every time. My kludge only works with the virus check function, as I said, and not with the "extract to any directory". I've written to PKware (I was going to say Phil Katz, but I bet he's retired long ago :-) ) and asked what parameter is actually passed by v6, but I'm fairly sure from ashquick's error message that it is passing it wrapped in quotes. You're quite correct that PKZIP really shouldn't extract to a directory containing files but, in their defence, it does warn you not to when you extract.
Anyway, I can't afford to buy a new version of PKZIP (there aren't enough new features to justify it, and no one I know can handle the higher compressions in v6, never mind v.8 - so I guess I'll have to give up at that - or always extract to the same directory.