Not exactly...
Disk compression in Windows XP works on NTFS drives only; it is a filesystem-level feature, which is known and documented - meaning that recovery is possible.
Personally I'd recommend a good scrubbing over disk compression:
- remove unnecessary apps (do you really need 15 media players? A complete Office suite when you use only the word processor? 3 antivirus? 5 malware cleaners?)
- clean up cruft: stuff like Java leave full install sets behind (12 Mb each) after removal, and it's not the only one; clean up your Program Files folders
- clean up temporary folders: they are not always emptied (one is in windows/temp, others are in your user account's Local Settings folder)
- reduce Internet Explorer's cache to 50 Mb (instead of 2 Gb)
- reduce space given to System Restore: 10 Gb used to keep stall files isn't a good idea (personally, I usually disable it or keep it at 200 Gb on the boot disk, disabled on all others)
- if you don't use hibernation, disable it: with 2 Gb of RAM, this is 2 Gb of wasted hard disk.
- if you have loads of RAM, reduce swap file size: with 2 Gb of RAM, a swap of 1 Gb or less is already more than enough.
- try to see if your email client can't compact your inbox: deleted messages don't mean freed space without a full repack of the inbox file.
- look inside Windows' folder: you'll find (hidden) files used to store old versions of files left behind by Windows Update. If you never, ever rewind your patches, you can remove them.
Doing this, I once freed over 10 Gb of space on a friend's machine; on a 80 Gb hard disk, that still makes for some breathing space.