How to reproduce:
1) Have a VSS filesystem
2) Create "abc" directory in fs root
3) Add "abc" directory into repository using
"VSS|Create Project" action
4) Create "def" directory in "abc" directory
5) Add "def" directory into repository using
"VSS|Create Project" action
6) ERROR - "Create Project" command exits with error

Here is error output of "Create Project" command
("E:\\sources\\client2" is working directory amd
"C:\Program Files\Microsoft Visual Studio\VSS" is
SSDIR):

Please, check the execution string:
cmd /X /C "(mkdir \"E:\\sources\\client2\abc\\.\"
2>nul || echo.) && cd /D
\"E:\\sources\\client2\abc\" && \"C:\Program
Files\Microsoft Visual Studio\VSS\win32\SS.EXE\"
cd -I- -Yguest, \"/\abc\" && \"C:\Program
Files\Microsoft Visual Studio\VSS\win32\SS.EXE\"
workfold -I- -Yguest, \"E:\\sources\\client2\abc\"
&& \"C:\Program Files\Microsoft Visual
Studio\VSS\win32\SS.EXE\" create
-C@\"C:\DOCUME~1\<local_user>\LOCALS~1\Temp\tempVcsCmd42054input\"
 -I- -Yguest, \"def\" "
/\abc is not a valid switch, and will be ignored.
Continue anyway?(Y/N)N