In the last few days, my IE browser has been unable to open files
directly from a site. For example, downloading a zip file and shocing
to open results in a "Cannot open C:\Documents and
Settings...\foo.zip" error. This issue is also manifested in my Office
products. When browsing the clipart online, clicking an item gves the
same error.

I've got the cache cleaned, all defaults are normal, and i'm not sure
what caused the issue. Is there a fix for this problem?

It sounds like your problem could be one of several different things.
First it could be whatever program you have associated with your zip
files. Windows XP comes with a built in zip explorer that is the
default ZIP file viewer. It could be that this part of windows is
corrupt and a simple reinstall of XP could fix this. If it is an
earlier version of windows most likely you have a program like winzip
to view them. Try reinstalling whatever viewing program you use for
zip files in that case. To verify this is the issue you could try
Saving the file to say the root of your C:\ drive instead of Opening
the file directly from the site. If this works then the issue is not
your ZIP viewing program but most likely another part of windows, say,
Internet explorer itself. Now since the issue is also in your office
products this could be a sign of a deeper problem. Windows XP and ME
have Internet Explorer like components built in to their core. Thus if
you have a huge problem with one of these components you will notice
some funny stuff going on. Since this problem seems to be in Microsoft
Products (IE and Office) I would think that something in windows has
gotten corrupted at the core level. The only way to fix this without a
degree in Computer Science I would say is to just reinstall XP or ME
over the existing copy. XP is good about saving your registry and
settings and only replacing the core components and runtime files. But
ME is a bit more difficult. If you have XP I would go ahead and
reinstall. If not I would take it to a computer repair place and have
them do it, if you dont feel comfortable doing it yourself. In short,
this is sounds like a software issue and reinstalling should fix it.

tmask's comment seems comprehensive, but allow me to offer a temporary
suggestion, something to consider, perhaps, while trying the solutions
offered in tmask's comment:

Don't use Internet Explorer.  It's unsecure, it consumes memory, and
its popup blocker seems less than capable.  Broswers like FireFox
(www.getfirefox.com) or Opera (www.opera.com) will keep you safer and
more functional.

1) Stop using IE, use Mozilla Firefox (www.mozilla.org)

2) Install Winzip 9.0 and indicate you want it to be your default
application for zip files

Thanks for the info on FireFox, but it isn't as safe and wonderful as
it's made out to be. In fact, the reason it's only slightly safer than
IE is because its content and media delivery is lacking, thus safe.

It's also had some glarinf security issues pop up recently that pretty
much wiped out the whole safety thing they've been touting.

*****
I may have found the real problem, and need a solution to this:
I think the base of my problem is that my Content.IE5 folder has up
and vasnished on me - literally taking away the ability to save
downloaded files. Any idea on how to restore it?

No, it is much safer.  My viruses and spyware have dipped to almost
zero from upwards of 100-150 a week.   Plus, it's donwload manager
(built0in) allows for you to pause the download.  Not only that, it is
extermely customizable, called 'extensions' which make it wonderful. 
a new version is availible like every few months.  The security issues
were fixed, also.  But believie me, it is much more safer the IE and
more user friendly with the themes, extensions, and being ultra
custmizable.  Make sure you get the newest version, spend 30 mins in
the extensions and themes page, then another  5 in the browser
customizing all the toolbars, and you will never, ever want to go back
to IE.  It also loads pags faster becuase it reads the code
differently the IE.

Ok, I appreciate the all out dedication to FireFox/Mozilla, but it
REALLY doesn't solve my initial problem - anyone with a SOLUTION,
please reply.

Be more brief of your questions. What operating system are you
running? Have you tried reformating your computer?

You're unzip function has hit a snag.

It's a part of Windows XP.  That's why you see if from IE and Office. 
You can't just put the Content.IE5 folder back and get everything
functioning again.  There is too much tied into the operating system
that can not easily be reset.  So you essentially need to tell
everything that uses the operating system that there is a new "unzip"
sheriff in town, thereby resetting the system to find the proper files
and directories.

You can restore this function a few ways.
1) Windows XP reinstall (tough business unless its a new machine and
you can use the vendor CD's or DVD)
2) Download and install a Windows unzip program like PKUNZIP or WINZIP
and set them up as your default "unzip" program.  Thereby establishing
a new "unzip" sheriff.  (Can't just install this piece from
Microsoft.)  (Try the 7 day trial version of WINZIP before you plunk
down the $29 on either product.)
3) I hate to say it, but Mozilla Firefox might also fix it, not
because it is better or worse, but because it comes with it's own
unzip program that works quite well.  However, this path may not solve
the issue you're having with your office products.  It's like bringing
in a Browser "deputy" when you need and Operating System "sheriff". 
The browser unzips will probably work but I'm not sure that the
Microsoft Office unzips will work.  (BUT THIS ROUTE IS FREE)

Let me know how you make out.