OK, I see what you are asking about. Disk Cleanup can be found on the Start menu in All Programs/Accessories/System Tools/Disk Cleanup. It is only in Windows 2000, XP, and Vista and only available on NTFS drives.
When you check the Compress Old Files item and click on the OK button, it does not delete anything (unlike the other items). Instead it goes through your hard drive and compresses any files that are older than 50 days old.
You can change the amount of days by clicking on the Options button that appears when you select the Compress old files item.
The idea is that if they are that old, you probably do not use them very often and so it is not a problem to compress them and thus save room. When you run the compressed file, it will take a little longer for it to run because Windows will uncompress the file to a temporary location (unbeknowns to you) and then run it.
Files that are compressed have blue filenames in Windows Explorer. You can uncompress any individual file by right clicking on it and selecting Properties. Click the Advanced button, uncheck Compress contents to save disk space, and click OK.
Some people fear that something will go wrong during the compressing and uncompressing of the file which will ruin it. That does not seem to be a problem.
If you use Compress Old Files, you will probably notice that the compressed programs load slower. Another possible problem is that if Windows crashes or later you have to access the compressed files from another system, either you will not be able to uncompress them or it will be a huge hassle to uncompress them all.
There is also the problem of what happens if you run out of room on your drive with all of the older files compressed and/or you decide that you don't want them compressed? Where are you going to uncompress them to? Or are you going to want to spend all of that time uncompressing them?
If you are desperate for space on your hard drive, checking Compress old file is an option. If you do not need free space, leave it unchecked.