Yes - when I add the 'doesn't work' url string you posted in the address bar after my own url/HTMLEditor/directory path, I get the old standard type kfm file browser that you are currently getting. That is the same url that my editor defaults to if I leave the htaccess file entirely intact.
People on other threads have reported solving the problem by deleting just the 'php_value magic_quotes_gpc off' lines under the 'mod_php4c' & 'mod_php4c' lines.
All academic as Eric will sort it in a flash, but just curious!
Thanks Neilo - I tried removing those lines in the htaccess...no joy I'm afraid.