According to the book "Microsoft Windows Server 2003: Delta Guide" (the top of page 33, compressed folders) the compression and decompression is done on the Server:
Another drawback to NTFS compression is that, because it is a file system attribute, it is compressed only on the file system. The implication of this is that, if you access the file across the network, it is first uncompressed by the operating system and then sent across the network in an uncompressed format. Thus, no network bandwidth improvement occurs because the file is sent across the network as if it were never compressed.
I've not (yet) found a Microsoft web page stating it that clear.