>>>Does it compress all the files on a HDD so it can hold more data?<<

Yes.

Chewy,
from my old A+ course notes re: 'Drivespace' in Windows 9X:

A compressed drive is not a drive at all; it's a file.

What Drivespace does to compress a drive:

* Assigns a different drive letter to the hard drive, such as H.
* Compresses entire contents of the hard drive onto a single file on drive H
* Sets up the drive so that Windows 9X and other applications view this compressed file as drive C.
* Configures Windows 9X so that each time it boots, the Drivespace driver will load and manage the compressed drive.

It gets a bit confusing when you start to try and understand where data is actually going on a compressed drive and what the data compression engine does to the appearence of your disk drives.

One more thing to remember for the exam: Drivespace doesn't work with FAT 32 under Windows 98.

Like Shelly said, the whole process is extinct these days.