Yeah - I don't know of any problems in the CF version of the library regarding unpacking to directories. I've tested this and it works for me.
The code has been under more or less continual change since 2006. At this point it may be easier for you to add the "directory unpacking" to yoru modified code, than to take the new code and re-fit it to your requirements.
You didn't ask, but... regarding your statement:
> We have modified the code slightly so that standard unzipping tools like windows explorer wont open the files.
...that seems like an unnecessary complication. But I guess you know what you're doing.
About the copyright - I was an employee of Microsoft Corporation at the time I started writing the library in my spare time. I am no longer an employee of the corporation, and I used no corporate resources to create it. So I reverted to a simpler
copyright, in my name only. Regarding your questions about using the source - check the license. It is MS-PL.