Before you revert to the last version, can you please try this once again and send me the output from the transcript drawer. To get to this point, click "Cancel" in the password dialog and "Add" in the Matryoshka archives message box after going through the cycle once.

And what is the exact path to BetterZip.app on your Mac? I don't see the reason for this bug, but I suspect a problem with the paths of either BetterZip or the archives. I can't reproduce the bug on my own machines, but I have changed some low-level routines that deal with paths and filename encodings. So, that might be the root of the problem.