You can use File#isDirectory() to test if the given file (path) is a directory. If this is true, then you just call the same method again with its File#listFiles() outcome. This is called recursion.

Here's a basic kickoff example:

package com.stackoverflow.q3154488;

import java.io.File;

public class Demo {

    public static void main(String... args) {
        File dir = new File("/path/to/dir");
        showFiles(dir.listFiles());
    }

    public static void showFiles(File[] files) {
        for (File file : files) {
            if (file.isDirectory()) {
                System.out.println("Directory: " + file.getAbsolutePath());
                showFiles(file.listFiles()); // Calls same method again.
            } else {
                System.out.println("File: " + file.getAbsolutePath());
            }
        }
    }
}

Note that this is sensitive to StackOverflowError when the tree is deeper than the JVM's stack can hold. If you're already on Java 8 or newer, then you'd better use Files#walk() instead which utilizes tail recursion:

package com.stackoverflow.q3154488;

import java.io.File;
import java.nio.file.Files;
import java.nio.file.Path;
import java.nio.file.Paths;

public class DemoWithJava8 {

    public static void main(String... args) throws Exception {
        Path dir = Paths.get("/path/to/dir");
        Files.walk(dir).forEach(path -> showFile(path.toFile()));
    }

    public static void showFile(File file) {
        if (file.isDirectory()) {
            System.out.println("Directory: " + file.getAbsolutePath());
        } else {
            System.out.println("File: " + file.getAbsolutePath());
        }
    }
}

If you have the directory name in myDirectoryPath,

import java.io.File;
...
  File dir = new File(myDirectoryPath);
  File[] directoryListing = dir.listFiles();
  if (directoryListing != null) {
    for (File child : directoryListing) {
      // Do something with child
    }
  } else {
    // Handle the case where dir is not really a directory.
    // Checking dir.isDirectory() above would not be sufficient
    // to avoid race conditions with another process that deletes
    // directories.
  }

The answer is in this article: http://www.baeldung.com/java-compress-and-uncompress

This code zips multiple files (Very similar to your code but slightly changed):

public class ZipMultipleFiles {
    public static void main(String[] args) throws IOException {
        List<String> srcFiles = Arrays.asList("test1.txt", "test2.txt");
        FileOutputStream fos = new FileOutputStream("multiCompressed.zip");
        ZipOutputStream zipOut = new ZipOutputStream(fos);
        for (String srcFile : srcFiles) {
            File fileToZip = new File(srcFile);
            FileInputStream fis = new FileInputStream(fileToZip);
            ZipEntry zipEntry = new ZipEntry(fileToZip.getName());
            zipOut.putNextEntry(zipEntry);

            byte[] bytes = new byte[1024];
            int length;
            while((length = fis.read(bytes)) >= 0) {
                zipOut.write(bytes, 0, length);
            }
            fis.close();
        }
        zipOut.close();
        fos.close();
    }
}

EDIT: This line in the code creates an array that is easy to go through in a while loop: List<String> srcFiles = Arrays.asList("test1.txt", "test2.txt");

Your code looks okay except you have to organized it as follows especially showFiles method.

public static void showFiles(File[] files) throws IOException {
    String line = null;

    try{
        for (File file : files) {
            if (file.isDirectory()) {
                String fileName = "Directory: " + file.getName();
                System.out.print(fileName);
                showFiles(file.listFiles()); // Calls same method again.
            } else {
                System.out.print("\tFile: " + file.getName() + file.toString());
                //System.out.println("Directory: " + file.getName());
                BufferedReader in = new BufferedReader(new FileReader(file));
                while((line = in.readLine()) != null)
                {
                    System.out.print("\t Content:" + line);
                }
                in.close();
                System.out.println();
            }
        }
    }catch(NullPointerException e){
        e.printStackTrace();
    }

And the output will look like:

Directory: Folder 1 File: C:\Search Files\Folder 1\test.txt  Content:this is a test
Directory: Folder 2 File: C:\Search Files\Folder 2\test.txt  Content:this is a test
Directory: Folder 3 File: C:\Search Files\Folder 3\test.txt  Content:this is a test
Directory: Folder 4 File: C:\Search Files\Folder 4\test.txt  Content:this is a test