If you are referring to Drwatson32.log usually in C:\Documents and Settings\All Users\Application Data\Microsoft\Dr Watson folder, you can delete it. DrWatson will create a new one when it needs it. However, if you wish you can also create a new one. Open Notepad type the following two lines:

Microsoft (R) DrWtsn32
Copyright (C) 1985-2001 Microsoft Corp. All rights reserved.

 

and save it as Drwatson32.log (make sure that Notepad has not added the .txt extension, as it sometimes does) in the same folder.

 

http://support.microsoft.com/kb/308538/en-us

 

If you are not seeing the file extensions, .log, etc., control panel, folder options, view tab, uncheck 'hide extensions for known file types', click Apply, OK. This is useful to make sure you are looking at the right file.

 

By compressing files you do indeed save disk space. If that included system files, they will be decompressed when needed, which may slow things down a tiny bit. If they are data files, you may need to decompress them before opening them. Unless you are very short of space on your hard drive it generally is not particularly useful to compress old files.

 

http://support.microsoft.com/kb/307987/en-us and links therein.