Thanks to the poster who suggested the zip file might be zip.zip - it was! Win 7 is a little greek to me - more experienced with XP and Mac Lion but 7 didn't show the extensions (zip.zip) even in Detail display or List. Everything is working now and I even have Market and got some of my apps downloaded and installed.
Still not sure why my internal storage doesn't show up in Windows Explorer when I tether it with a USB wire?! But I do have a 16 GB micro SD so I shouldn't run out of space any time soon.