Take a look at http://www.icsharpcode.net/OpenSource/SharpZipLib/Default.aspx and their DIME example.

Rather than returning the dataset, the server does something like this:

 MemoryStream memoryStream = new MemoryStream(1024);
 GZipOutputStream gzipStream = new GZipOutputStream(memoryStream);
 ds.WriteXml(gzipStream);
 gzipStream.Finish();
 memoryStream.Seek(0, SeekOrigin.Begin);

 DimeAttachment dimeAttachment = new DimeAttachment("application/x-gzip",
                           TypeFormat.MediaType,memoryStream);
      sc.Attachments.Add(dimeAttachment);

And the client does this:

 GZipInputStream gzipInputStream = new GZipInputStream(sc.Attachments[0].Stream);
 MemoryStream ms = new MemoryStream(1024);
 int nSize = 2048;
 byte[] writeData = new byte[2048];

 while (true)
 {
   nSize = gzipInputStream.Read(writeData, 0, nSize);
   if (nSize > 0)
    ms.Write(writeData, 0, nSize);
   else
   break;
 }
   
 ms.Seek(0, SeekOrigin.Begin);

 DataSet ds = new DataSet();
 ds.ReadXml(ms);
The net result of all of this is that you wind up passing the dataset as a zipped attachment - just like a zipped image.