IIS 4 does not support native compression and it is necessary to implement a third party product to enable compression.

IIS 5 does in theory support compression, however there are several issues with the implementation and third party products are widely considered to be more reliable.

Generally we like to advocate using free and open source tools and making configuration changes yourself - but this is one case where we consider it worth investing in third party tools.

Port 80 Software have developed a widely used and recommended product called httpZip that adds compression support to IIS 4, and replaces the built-in compression support in IIS 5. It offers browser detection to avoid compatibility issues, defaults to compressing file extensions suitable for compression, has a GUI for configuration and reporting, implements intelligent caching, gives more flexibility over what is compressed, and fixes many of the issues observed in IIS 5. We recommend httpZip as a way of implementing compression on IIS 4 and 5. It is possible to download a 30 day trial to evaluate httpZip, which can be found at http://www.port80software.com/products/httpzip/.

Other products do exist that implement some of the same functionality. These include:

PipeBoost: http://www.pipeboost.com/
Xcompress: https://secure.xcache.com/Page.aspx?c=54&p=522
Flat Compression - a free product: http://www.flatcompression.org/