When IIS receives a request, it first checks whether the browser is compression-enabled or not. If the compression is enabled, IIS then checks the file name extension to see if the requested file is a static file or contains dynamic content. If the file contains static content, IIS checks to see if the file has previously been requested and is already stored in a compressed format in the temporary compression directory. If the file is not stored in a compressed format, IIS sends the uncompressed file to the browser and adds a compressed copy of the file to the temporary compression directory. If the file is stored in a compressed format, IIS sends the compressed file to the browser. Files are compressed only when they have been requested at least one time by a browser.

If the file contains dynamic content, IIS compresses the file as it is generated and sends the compressed file to the browser. Unlike static content, no copy of the file is stored.
The cost of compressing a static file is modest and is typically incurred only one time because the file is then stored in the temporary compression directory. The cost of compressing dynamically generated files is a little higher because they are not stored and must be regenerated with each request. The cost of expanding the file at the browser is minimal. The download of compressed files is faster and it is particularly beneficial to the performance of any browser that uses a network connection with restricted bandwidth (a modem for example).