Hey folks, we think the issue has now been fixed for the Web Sites/Web Hosting. We patched our servers earlier this week. We did not apply the fix to our Business Applications area yet, so we think the issue may still exist there. But since that area has lower usage, we wanted to get the change out for Web Hosting first to see if it helped.
Please go ahead and try this out to see if it fixed the problems you were encountering. Also, if you don't yet have Business Applications, you should check them out and let us know if you see the problem there still in Document Libraries for example.
For some additional background... The issue is not that Office Live is corrupting the ZIP files. The issue is actually a bug in Internet Explorer in interpreting ZIP file types. That's why Firefox worked OK. Here's the KB article that describes the problem. So yes, it is a Microsoft bug, but nothing special that Office Live did to cause this. To make matters worse, our corporate network proxies/environment did something to mask the problem, so we had a very hard time reproducing the issue.
Thanks everyone who gave us your repro steps and helped out on this one. Please check it one last time and let us know how it goes!
Chris
Chris Beiter
Program Manager, Office Live Small Business
http://blogs.msdn.com/cbeiter/