This issue is still present in Gutsy. There's a kind of a workaround.

Ignoring the drag and drop comments completely, the original bug
described can be reproduced as:

1. Open a (eg) zip file in a folder, eg the file /w/zip/zipfile.zip
containing a single file.

2. Optionally select the file.

3. Press extract. The extract location dialog box appears.

4. Press the extract button in this dialog box. Nothing happens.

5. Enter '.' as the extract location and press the enter key or the
extract button. Fill-roller complains: "The folder could not be created.
/w/zip already exists."

The workaround:

6. Along the top are buttons for 'w' and for 'zip'. Click on 'w' and
then click on 'zip'. Then click extract. This time it works. It doesn' t
matter if you have done step 5 or not.

-- 
extracting doesn't work right when the location entry is displayed
https://bugs.launchpad.net/bugs/80755
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