I say Avoid If Possible. If you have to re-install Win95, you might
   not be able to read the compressed drive to perform the
   re-installation on!
   
   However, it can be done. You will have to have Disk Compression
   installed in Win95; check Add/Remove Programs / Windows Setup / Disk
   Tools. Then, right-click on your target hard drive and bring up its
   properties. You should see a Compression tab which gives you two
   options. Select the option to compress the whole hard drive.
   
   This built in compression (Affectionately called "DriveSpace 2") will
   re-boot your computer and run a compression process in a "miniature"
   Windows 3.1 environment. This means you can't use your computer while
   this happens. This does take a long time, so you should get it started
   and let it run overnight. When completed, you will have two active
   drive letters, or volumes; your original hard drive (Re-named to "H:"
   or some such thing) and your new compressed hard drive (Renamed "C:"
   to replace your original hard drive).