I had previously set up the same virtual machine image from the same .zip archive on another machine. I tried copying the uncompressed image file (about 6 GB in size) from that machine, but got another error, this time from Windows Explorer: "there is not enough free disk space".
I checked, and I did have only about 5 GB free. At this point I figured that the Winzip error might have been a symptom of the insufficient free space on the drive, with the weird error text possibly being attributable to the large size of the file.
I cleared some large files off the drive -- mostly old SQL Server databases and old Virtual PC images -- and got up to over 20 GB of free space. However, when I retried the copy operation, I still got the same error from Explorer about insufficient free disk space.
A quick Google search on that error revealed that the problem might be that if the test machine was running the old FAT32 filesystem instead of the modern NTFS system, that error message could result, as FAT32 supports file sizes only up to 4 GB. I also noticed that Winzip was reporting the uncompressed size of the virtual machine image file as 4 GB instead of the correct 6 GB, which seemed to be a symptom consistent with the .zip archive file being stored on a FAT32 drive. The test machine was indeed running FAT32 (checked by opening My Computer from the desktop, right-clicking the C drive, and selecting Properties from the context menu) and I had no reason not to upgrade it, so I went ahead and ran convert.exe to do the upgrade to NTFS.
When the upgrade to NTFS eventually finished, I once again tried to copy the uncompressed machine image across the network to the test machine, but the network itself decided not to cooperate at this point, and the transfer was progressing extremely slowly (even given the 6 GB file size). So at that point I turned my attention back to uncompressing the image from the .zip archive, figuring that it would now work since the filesystem was now NTFS and the disk had sufficient free space.
To my surprise, I continued to get the same error about "Zip 2.0" format. I also noticed that Winzip was still reporting the uncompressed VM image file size as 4 GB instead of the correct 6 GB. Earlier I had ignored the www.winzip.com/zip20.htm URL mentioned in the Winzip error message, assuming it would be similarly unhelpful to the Microsoft site links that Windows error dialogs that come up when an app crashes occasionally provide, but at this point I figured it was worth a look.
The text on the linked page isn't terribly helpful, mostly text encouraging an upgrade to Winzip 10 (which isn't a free upgrade even for registered/paying users of Winzip 9 and previous versions). However, it does mention something about a particular compression method, "bzip2", requiring Winzip 9 or later.
At this, I checked the Winzip version numbers (on the app's Help | About menu) on both of my machines. On the machine where I had previously successfully uncompressed the large virtual machine image file, Winzip 9 was installed; on the test machine where I was having trouble, Winzip 8 was installed. Aha!
I upgraded the test machine to Winzip 9. Once that was done, I was able to uncompress the image file from the .zip archive with no trouble.
So, on the "this file is not in the standard Zip 2.0 format" error from Winzip, the thing to do is to upgrade to Winzip 9 if you're running an earlier version. It took me a while to get that figured out, but at least I had a reasonable excuse to spend a little time to get the disk on my test machine cleaned up and upgraded to NTFS along the way. :-)