The science behind compression is actually pretty interesting. I've got a buddy who does it from the math angle. It is possible to do that, but you have to remember that each compression and expansion probably results in losses. Then again, a well done algorithm can actually improve quality (this is possible for images).
For something like this, it could just be a very slick algorithm. Or maybe it draws on files already available on your computer (for example, if the same thing can be assumed to be on every computer, you could "compress" something by deleting it and merely leaving an instruction to go find it when commanded to expand). Similarity in coding multiple parts might also lead to such things.
That said, I agree with Dzomlija. Don't mess with it. Something like that is a good red-flag. Just buy a legit copy. Screwing MS out of some money for something you will use every day isn't worth it. Compare its cost to a movie. If it keeps you happy for 2 hours, it's worth $8. For $100, then, it merely has to entertain you for about 13 hours. I figure you'll use it more than that. Even pro-rated with what it enables you to enjoy, we'll say a couple hundred hours. If you're not going to use the OS a couple hundred hours, you don't need it. If you will, the money is well spent.