Directories in the ZIP file are shown (by default - this setting can be switched off) the same way that IIS shows "real" directories. If the users browses any file in the .Zip archive file, the file will be downloaded naturally (with proper handling of Last-Modified Http headers).

This handler can also use a cache directory to speed things up.

For reading .ZIP files, it is based on the famous http://www.zlib.org accessed through P/Invoke call (it is actually a special version I have very slightly modified that does not force us to use UNSAFE C# compilation. I can provide the modified source for those who would like to have it). By the way, the code provides a full blown unzip C# interface that can be reused in non HTTP contexts. Updating and creating .ZIP file is not handled, only reading.