Combine chocolate and water in a heavy saucepan.
Place over very low heat, stirring constantly, until chocolate is melted.
Add the 1/2 cup sugar and stir until dissolved.
Set aside to cool.
Sift flour, baking powder, baking soda, and salt together; set aside.
Cream butter with extract; gradually add the 11/4 cups sugar, creaming until fluffy.
Add eggs in thirds, beating thoroughly after each addition.
Blend in chocolate mixture.
Beating only until smooth after each addition, alternately add dry ingredients in fourths and milk in thirds to creamed mixture.
Turn batter into 2 prepared 8x8x2-inch baking pans and spread evenly to edges.
Bake at 350°F 25 to 30 minutes, or until cake tests done.
Cool and remove from pans as directed for butter-type cakes.
Fill and frost with Fudge Frosting II.