I get the sense from your response that you want someone else to respond. Maybe someone else will chime in, but I'm pretty confident that my advice to you is good. Just give it a try, and I think you will find that it works exactly as you want it to work. I am pretty sure that those two options (overwrite existing backup, and cleanup output path) apply to the main backup, not the zipped backup.
I have it set up exactly as you describe. I have all of my backups going to a "MM Backup" folder. I
don't have the "cleanup output path" box checked, but I
do have "Overwrite Existing Backup" option checked, and every time I run the backup script, the newest backup files get put into the MM Backup folder (overwriting the old backup). I also have the option checked to have a zipped folder of the backup files saved to my "Archive" folder within my MM Backup folder. Since I have the zipped mask set to write it with the date and time, I have a nice little archive of backups saved according to date. Think of it as two different backups. One is zipped, and one is not.
In other words, just try what I suggested. Like I said, I think it will work out exactly as you want it to.
If it is helpful, here are my settings.
http://www.mediamonkey.com/forum/viewtopic.php?f=2&t=7746&start=990#p335223Good luck!