This is a free, open-source file compress/uncompress program. It has multiple uses, typically used to either a) turn multiple files into one convenient file or b) make a single file (or multiple files) smaller so they can be sent across the web faster or saved in a smaller space.
This program does a similar job as Winzip, if you are familiar with that, but this handles multiple file formats, and doesn't cost anything, unlike Winzip, which can only handle ZIP files and costs $40.
Windows XP does have a rudimentary compress/uncompress utility built in which may fit your needs. Like WinZip, however, it can only handle ZIP files.
Once installed, 7-zip adds some choices to the right-click menu in Windows, allowing you to build a zip file or extract a zip file without having to open 7-zip first.
In addition to ZIP files, 7-zip can also compress files into 7, GZIP, BZIP2, and TAR, although it gets the tightest compression using 7z. It can even make a self-extracting file, using the 7z format and checking on the "SXF" setting.
It also has the ability to open RAR, CAB, ARJ, LZH, CHM, Z, CPIO, RPM, and DEB files.