I have compression enabled within IIS7 and it works as expected on all responses except for those constructed by ASP.NET AJAX. I have a web service that provides data to the cl
What browser are you using? There's a bug in IE 6 that causes errors in compression. So ASP.NET AJAX turns off compression to IE 6 browsers:
http://weblogs.asp.net/scottgu/archive/2005/06/28/416185.aspx
Also, did you enable compression for ASMX files?