diff --git a/call.go b/call.go
index 89d2782..3cc8f1f 100644
--- a/call.go
+++ b/call.go
@@ -34,6 +34,7 @@
 package grpc
 
 import (
+	"bytes"
 	"io"
 	"time"
 
@@ -47,7 +48,7 @@
 // On error, it returns the error and indicates whether the call should be retried.
 //
 // TODO(zhaoq): Check whether the received message sequence is valid.
-func recvResponse(codec Codec, t transport.ClientTransport, c *callInfo, stream *transport.Stream, reply interface{}) error {
+func recvResponse(dopts dialOptions, t transport.ClientTransport, c *callInfo, stream *transport.Stream, reply interface{}) error {
 	// Try to acquire header metadata from the server if there is any.
 	var err error
 	c.headerMD, err = stream.Header()
@@ -56,7 +57,7 @@
 	}
 	p := &parser{s: stream}
 	for {
-		if err = recv(p, codec, reply); err != nil {
+		if err = recv(p, dopts.codec, stream, dopts.dg, reply); err != nil {
 			if err == io.EOF {
 				break
 			}
@@ -68,7 +69,7 @@
 }
 
 // sendRequest writes out various information of an RPC such as Context and Message.
-func sendRequest(ctx context.Context, codec Codec, callHdr *transport.CallHdr, t transport.ClientTransport, args interface{}, opts *transport.Options) (_ *transport.Stream, err error) {
+func sendRequest(ctx context.Context, codec Codec, compressor Compressor, callHdr *transport.CallHdr, t transport.ClientTransport, args interface{}, opts *transport.Options) (_ *transport.Stream, err error) {
 	stream, err := t.NewStream(ctx, callHdr)
 	if err != nil {
 		return nil, err
@@ -80,8 +81,7 @@
 			}
 		}
 	}()
-	// TODO(zhaoq): Support compression.
-	outBuf, err := encode(codec, args, compressionNone)
+	outBuf, err := encode(codec, args, compressor, new(bytes.Buffer))
 	if err != nil {
 		return nil, transport.StreamErrorf(codes.Internal, "grpc: %v", err)
 	}
@@ -129,7 +129,11 @@
 	}
 	var (
 		lastErr error // record the error that happened
+		cp      Compressor
 	)
+	if cc.dopts.cg != nil {
+		cp = cc.dopts.cg()
+	}
 	for {
 		var (
 			err    error
@@ -144,6 +148,9 @@
 			Host:   cc.authority,
 			Method: method,
 		}
+		if cp != nil {
+			callHdr.SendCompress = cp.Type()
+		}
 		t, err = cc.dopts.picker.Pick(ctx)
 		if err != nil {
 			if lastErr != nil {
@@ -155,7 +162,7 @@
 		if c.traceInfo.tr != nil {
 			c.traceInfo.tr.LazyLog(&payload{sent: true, msg: args}, true)
 		}
-		stream, err = sendRequest(ctx, cc.dopts.codec, callHdr, t, args, topts)
+		stream, err = sendRequest(ctx, cc.dopts.codec, cp, callHdr, t, args, topts)
 		if err != nil {
 			if _, ok := err.(transport.ConnectionError); ok {
 				lastErr = err
@@ -167,7 +174,7 @@
 			return toRPCErr(err)
 		}
 		// Receive the response
-		lastErr = recvResponse(cc.dopts.codec, t, &c, stream, reply)
+		lastErr = recvResponse(cc.dopts, t, &c, stream, reply)
 		if _, ok := lastErr.(transport.ConnectionError); ok {
 			continue
 		}
diff --git a/call_test.go b/call_test.go
index 48d25e5..22e42c2 100644
--- a/call_test.go
+++ b/call_test.go
@@ -98,7 +98,7 @@
 		}
 	}
 	// send a response back to end the stream.
-	reply, err := encode(testCodec{}, &expectedResponse, compressionNone)
+	reply, err := encode(testCodec{}, &expectedResponse, nil, nil)
 	if err != nil {
 		t.Fatalf("Failed to encode the response: %v", err)
 	}
diff --git a/clientconn.go b/clientconn.go
index 9c2e983..e81a488 100644
--- a/clientconn.go
+++ b/clientconn.go
@@ -73,6 +73,8 @@
 // values passed to Dial.
 type dialOptions struct {
 	codec    Codec
+	cg       CompressorGenerator
+	dg       DecompressorGenerator
 	picker   Picker
 	block    bool
 	insecure bool
@@ -89,6 +91,18 @@
 	}
 }
 
+func WithCompressor(f CompressorGenerator) DialOption {
+	return func(o *dialOptions) {
+		o.cg = f
+	}
+}
+
+func WithDecompressor(f DecompressorGenerator) DialOption {
+	return func(o *dialOptions) {
+		o.dg = f
+	}
+}
+
 // WithPicker returns a DialOption which sets a picker for connection selection.
 func WithPicker(p Picker) DialOption {
 	return func(o *dialOptions) {
diff --git a/rpc_util.go b/rpc_util.go
index e6b2236..f48ad32 100644
--- a/rpc_util.go
+++ b/rpc_util.go
@@ -34,9 +34,12 @@
 package grpc
 
 import (
+	"bytes"
+	"compress/gzip"
 	"encoding/binary"
 	"fmt"
 	"io"
+	"io/ioutil"
 	"math"
 	"math/rand"
 	"os"
@@ -75,6 +78,59 @@
 	return "proto"
 }
 
+type Compressor interface {
+	Do(w io.Writer, p []byte) error
+	Type() string
+}
+
+func NewGZIPCompressor() Compressor {
+	return &gzipCompressor{}
+}
+
+type gzipCompressor struct {
+}
+
+func (c *gzipCompressor) Do(w io.Writer, p []byte) error {
+	z := gzip.NewWriter(w)
+	if _, err := z.Write(p); err != nil {
+		return err
+	}
+	return z.Close()
+}
+
+func (c *gzipCompressor) Type() string {
+	return "gzip"
+}
+
+type Decompressor interface {
+	Do(r io.Reader) ([]byte, error)
+	Type() string
+}
+
+type gzipDecompressor struct {
+}
+
+func NewGZIPDecompressor() Decompressor {
+	return &gzipDecompressor{}
+}
+
+func (d *gzipDecompressor) Do(r io.Reader) ([]byte, error) {
+	z, err := gzip.NewReader(r)
+	if err != nil {
+		return nil, err
+	}
+	defer z.Close()
+	return ioutil.ReadAll(z)
+}
+
+func (d *gzipDecompressor) Type() string {
+	return "gzip"
+}
+
+type CompressorGenerator func() Compressor
+
+type DecompressorGenerator func() Decompressor
+
 // callInfo contains all related configuration and information about an RPC.
 type callInfo struct {
 	failFast  bool
@@ -126,8 +182,7 @@
 
 const (
 	compressionNone payloadFormat = iota // no compression
-	compressionFlate
-	// More formats
+	compressionMade
 )
 
 // parser reads complelete gRPC messages from the underlying reader.
@@ -166,7 +221,7 @@
 
 // encode serializes msg and prepends the message header. If msg is nil, it
 // generates the message header of 0 message length.
-func encode(c Codec, msg interface{}, pf payloadFormat) ([]byte, error) {
+func encode(c Codec, msg interface{}, cp Compressor, cbuf *bytes.Buffer) ([]byte, error) {
 	var b []byte
 	var length uint
 	if msg != nil {
@@ -176,6 +231,12 @@
 		if err != nil {
 			return nil, err
 		}
+		if cp != nil {
+			if err := cp.Do(cbuf, b); err != nil {
+				return nil, err
+			}
+			b = cbuf.Bytes()
+		}
 		length = uint(len(b))
 	}
 	if length > math.MaxUint32 {
@@ -190,7 +251,11 @@
 	var buf = make([]byte, payloadLen+sizeLen+len(b))
 
 	// Write payload format
-	buf[0] = byte(pf)
+	if cp == nil {
+		buf[0] = byte(compressionNone)
+	} else {
+		buf[0] = byte(compressionMade)
+	}
 	// Write length of b into buf
 	binary.BigEndian.PutUint32(buf[1:], uint32(length))
 	// Copy encoded msg to buf
@@ -199,22 +264,42 @@
 	return buf, nil
 }
 
-func recv(p *parser, c Codec, m interface{}) error {
+func checkRecvPayload(pf payloadFormat, recvCompress string, dc Decompressor) error {
+	switch pf {
+	case compressionNone:
+	case compressionMade:
+		if recvCompress == "" {
+			return transport.StreamErrorf(codes.InvalidArgument, "grpc: received unexpected payload format %d", pf)
+		}
+		if dc == nil || recvCompress != dc.Type() {
+			return transport.StreamErrorf(codes.InvalidArgument, "grpc: Decompressor is not installed for grpc-encoding %q", recvCompress)
+		}
+	default:
+		return transport.StreamErrorf(codes.InvalidArgument, "grpc: received unexpected payload format %d", pf)
+	}
+	return nil
+}
+
+func recv(p *parser, c Codec, s *transport.Stream, dg DecompressorGenerator, m interface{}) error {
 	pf, d, err := p.recvMsg()
 	if err != nil {
 		return err
 	}
-	switch pf {
-	case compressionNone:
-		if err := c.Unmarshal(d, m); err != nil {
-			if rErr, ok := err.(rpcError); ok {
-				return rErr
-			} else {
-				return Errorf(codes.Internal, "grpc: %v", err)
-			}
+	var dc Decompressor
+	if pf == compressionMade && dg != nil {
+		dc = dg()
+	}
+	if err := checkRecvPayload(pf, s.RecvCompress(), dc); err != nil {
+		return err
+	}
+	if pf == compressionMade {
+		d, err = dc.Do(bytes.NewReader(d))
+		if err != nil {
+			return transport.StreamErrorf(codes.Internal, "grpc: failed to decompress the received message %v", err)
 		}
-	default:
-		return Errorf(codes.Internal, "gprc: compression is not supported yet.")
+	}
+	if err := c.Unmarshal(d, m); err != nil {
+		return transport.StreamErrorf(codes.Internal, "grpc: failed to unmarshal the received message %v", err)
 	}
 	return nil
 }
diff --git a/rpc_util_test.go b/rpc_util_test.go
index 2673cd0..3f3749a 100644
--- a/rpc_util_test.go
+++ b/rpc_util_test.go
@@ -106,16 +106,40 @@
 	for _, test := range []struct {
 		// input
 		msg proto.Message
-		pt  payloadFormat
+		cp  Compressor
 		// outputs
 		b   []byte
 		err error
 	}{
-		{nil, compressionNone, []byte{0, 0, 0, 0, 0}, nil},
+		{nil, nil, []byte{0, 0, 0, 0, 0}, nil},
 	} {
-		b, err := encode(protoCodec{}, test.msg, test.pt)
+		b, err := encode(protoCodec{}, test.msg, nil, nil)
 		if err != test.err || !bytes.Equal(b, test.b) {
-			t.Fatalf("encode(_, _, %d) = %v, %v\nwant %v, %v", test.pt, b, err, test.b, test.err)
+			t.Fatalf("encode(_, _, %v, _) = %v, %v\nwant %v, %v", test.cp, b, err, test.b, test.err)
+		}
+	}
+}
+
+func TestCompress(t *testing.T) {
+	for _, test := range []struct {
+		// input
+		data []byte
+		cp   Compressor
+		dc   Decompressor
+		// outputs
+		err error
+	}{
+		{make([]byte, 1024), &gzipCompressor{}, &gzipDecompressor{}, nil},
+	} {
+		b := new(bytes.Buffer)
+		if err := test.cp.Do(b, test.data); err != test.err {
+			t.Fatalf("Compressor.Do(_, %v) = %v, want %v", test.data, err, test.err)
+		}
+		if b.Len() >= len(test.data) {
+			t.Fatalf("The compressor fails to compress data.")
+		}
+		if p, err := test.dc.Do(b); err != nil || !bytes.Equal(test.data, p) {
+			t.Fatalf("Decompressor.Do(%v) = %v, %v, want %v, <nil>", b, p, err, test.data)
 		}
 	}
 }
@@ -158,12 +182,12 @@
 // bytes.
 func bmEncode(b *testing.B, mSize int) {
 	msg := &perfpb.Buffer{Body: make([]byte, mSize)}
-	encoded, _ := encode(protoCodec{}, msg, compressionNone)
+	encoded, _ := encode(protoCodec{}, msg, nil, nil)
 	encodedSz := int64(len(encoded))
 	b.ReportAllocs()
 	b.ResetTimer()
 	for i := 0; i < b.N; i++ {
-		encode(protoCodec{}, msg, compressionNone)
+		encode(protoCodec{}, msg, nil, nil)
 	}
 	b.SetBytes(encodedSz)
 }
diff --git a/server.go b/server.go
index 655e7d8..e846f3b 100644
--- a/server.go
+++ b/server.go
@@ -34,6 +34,7 @@
 package grpc
 
 import (
+	"bytes"
 	"errors"
 	"fmt"
 	"io"
@@ -92,6 +93,8 @@
 type options struct {
 	creds                credentials.Credentials
 	codec                Codec
+	cg                   CompressorGenerator
+	dg                   DecompressorGenerator
 	maxConcurrentStreams uint32
 }
 
@@ -105,6 +108,18 @@
 	}
 }
 
+func CompressON(f CompressorGenerator) ServerOption {
+	return func(o *options) {
+		o.cg = f
+	}
+}
+
+func DecompressON(f DecompressorGenerator) ServerOption {
+	return func(o *options) {
+		o.dg = f
+	}
+}
+
 // MaxConcurrentStreams returns a ServerOption that will apply a limit on the number
 // of concurrent streams to each ServerTransport.
 func MaxConcurrentStreams(n uint32) ServerOption {
@@ -287,8 +302,8 @@
 	}
 }
 
-func (s *Server) sendResponse(t transport.ServerTransport, stream *transport.Stream, msg interface{}, pf payloadFormat, opts *transport.Options) error {
-	p, err := encode(s.opts.codec, msg, pf)
+func (s *Server) sendResponse(t transport.ServerTransport, stream *transport.Stream, msg interface{}, cp Compressor, opts *transport.Options) error {
+	p, err := encode(s.opts.codec, msg, cp, new(bytes.Buffer))
 	if err != nil {
 		// This typically indicates a fatal issue (e.g., memory
 		// corruption or hardware faults) the application program
@@ -327,82 +342,119 @@
 				// Nothing to do here.
 			case transport.StreamError:
 				if err := t.WriteStatus(stream, err.Code, err.Desc); err != nil {
-					grpclog.Printf("grpc: Server.processUnaryRPC failed to write status: %v", err)
+					grpclog.Printf("grpc: Server.processUnaryRPC failed to write status %v", err)
 				}
 			default:
 				panic(fmt.Sprintf("grpc: Unexpected error (%T) from recvMsg: %v", err, err))
 			}
 			return err
 		}
-		switch pf {
-		case compressionNone:
-			statusCode := codes.OK
-			statusDesc := ""
-			df := func(v interface{}) error {
-				if err := s.opts.codec.Unmarshal(req, v); err != nil {
-					return err
+
+		var dc Decompressor
+		if pf == compressionMade && s.opts.dg != nil {
+			dc = s.opts.dg()
+		}
+		if err := checkRecvPayload(pf, stream.RecvCompress(), dc); err != nil {
+			switch err := err.(type) {
+			case transport.StreamError:
+				if err := t.WriteStatus(stream, err.Code, err.Desc); err != nil {
+					grpclog.Printf("grpc: Server.processUnaryRPC failed to write status %v", err)
 				}
-				if trInfo != nil {
-					trInfo.tr.LazyLog(&payload{sent: false, msg: v}, true)
-				}
-				return nil
-			}
-			reply, appErr := md.Handler(srv.server, stream.Context(), df)
-			if appErr != nil {
-				if err, ok := appErr.(rpcError); ok {
-					statusCode = err.code
-					statusDesc = err.desc
-				} else {
-					statusCode = convertCode(appErr)
-					statusDesc = appErr.Error()
-				}
-				if trInfo != nil && statusCode != codes.OK {
-					trInfo.tr.LazyLog(stringer(statusDesc), true)
-					trInfo.tr.SetError()
+			default:
+				if err := t.WriteStatus(stream, codes.Internal, err.Error()); err != nil {
+					grpclog.Printf("grpc: Server.processUnaryRPC failed to write status %v", err)
 				}
 
-				if err := t.WriteStatus(stream, statusCode, statusDesc); err != nil {
-					grpclog.Printf("grpc: Server.processUnaryRPC failed to write status: %v", err)
+			}
+			return err
+		}
+		statusCode := codes.OK
+		statusDesc := ""
+		df := func(v interface{}) error {
+			if pf == compressionMade {
+				var err error
+				req, err = dc.Do(bytes.NewReader(req))
+				//req, err = ioutil.ReadAll(dc)
+				//defer dc.Close()
+				if err != nil {
+					if err := t.WriteStatus(stream, codes.Internal, err.Error()); err != nil {
+						grpclog.Printf("grpc: Server.processUnaryRPC failed to write status %v", err)
+					}
 					return err
 				}
-				return nil
 			}
-			if trInfo != nil {
-				trInfo.tr.LazyLog(stringer("OK"), false)
-			}
-			opts := &transport.Options{
-				Last:  true,
-				Delay: false,
-			}
-			if err := s.sendResponse(t, stream, reply, compressionNone, opts); err != nil {
-				switch err := err.(type) {
-				case transport.ConnectionError:
-					// Nothing to do here.
-				case transport.StreamError:
-					statusCode = err.Code
-					statusDesc = err.Desc
-				default:
-					statusCode = codes.Unknown
-					statusDesc = err.Error()
-				}
+			if err := s.opts.codec.Unmarshal(req, v); err != nil {
 				return err
 			}
 			if trInfo != nil {
-				trInfo.tr.LazyLog(&payload{sent: true, msg: reply}, true)
+				trInfo.tr.LazyLog(&payload{sent: false, msg: v}, true)
 			}
-			return t.WriteStatus(stream, statusCode, statusDesc)
-		default:
-			panic(fmt.Sprintf("payload format to be supported: %d", pf))
+			return nil
 		}
+		reply, appErr := md.Handler(srv.server, stream.Context(), df)
+		if appErr != nil {
+			if err, ok := appErr.(rpcError); ok {
+				statusCode = err.code
+				statusDesc = err.desc
+			} else {
+				statusCode = convertCode(appErr)
+				statusDesc = appErr.Error()
+			}
+			if trInfo != nil && statusCode != codes.OK {
+				trInfo.tr.LazyLog(stringer(statusDesc), true)
+				trInfo.tr.SetError()
+			}
+			if err := t.WriteStatus(stream, statusCode, statusDesc); err != nil {
+				grpclog.Printf("grpc: Server.processUnaryRPC failed to write status: %v", err)
+				return err
+			}
+			return nil
+		}
+		if trInfo != nil {
+			trInfo.tr.LazyLog(stringer("OK"), false)
+		}
+		opts := &transport.Options{
+			Last:  true,
+			Delay: false,
+		}
+		var cp Compressor
+		if s.opts.cg != nil {
+			cp = s.opts.cg()
+			stream.SetSendCompress(cp.Type())
+		}
+		if err := s.sendResponse(t, stream, reply, cp, opts); err != nil {
+			switch err := err.(type) {
+			case transport.ConnectionError:
+				// Nothing to do here.
+			case transport.StreamError:
+				statusCode = err.Code
+				statusDesc = err.Desc
+			default:
+				statusCode = codes.Unknown
+				statusDesc = err.Error()
+			}
+			return err
+		}
+		if trInfo != nil {
+			trInfo.tr.LazyLog(&payload{sent: true, msg: reply}, true)
+		}
+		return t.WriteStatus(stream, statusCode, statusDesc)
 	}
 }
 
 func (s *Server) processStreamingRPC(t transport.ServerTransport, stream *transport.Stream, srv *service, sd *StreamDesc, trInfo *traceInfo) (err error) {
+	var cp Compressor
+	if s.opts.cg != nil {
+		cp = s.opts.cg()
+		stream.SetSendCompress(cp.Type())
+	}
 	ss := &serverStream{
 		t:      t,
 		s:      stream,
 		p:      &parser{s: stream},
 		codec:  s.opts.codec,
+		cp:     cp,
+		dg:     s.opts.dg,
 		trInfo: trInfo,
 	}
 	if trInfo != nil {
@@ -422,6 +474,9 @@
 		if err, ok := appErr.(rpcError); ok {
 			ss.statusCode = err.code
 			ss.statusDesc = err.desc
+		} else if err, ok := appErr.(transport.StreamError); ok {
+			ss.statusCode = err.Code
+			ss.statusDesc = err.Desc
 		} else {
 			ss.statusCode = convertCode(appErr)
 			ss.statusDesc = appErr.Error()
diff --git a/stream.go b/stream.go
index d8bdc16..1a8d0e4 100644
--- a/stream.go
+++ b/stream.go
@@ -34,6 +34,7 @@
 package grpc
 
 import (
+	"bytes"
 	"errors"
 	"io"
 	"sync"
@@ -104,14 +105,23 @@
 	if err != nil {
 		return nil, toRPCErr(err)
 	}
+	var cp Compressor
+	if cc.dopts.cg != nil {
+		cp = cc.dopts.cg()
+	}
 	// TODO(zhaoq): CallOption is omitted. Add support when it is needed.
 	callHdr := &transport.CallHdr{
 		Host:   cc.authority,
 		Method: method,
 	}
+	if cp != nil {
+		callHdr.SendCompress = cp.Type()
+	}
 	cs := &clientStream{
 		desc:    desc,
 		codec:   cc.dopts.codec,
+		cp:      cp,
+		dg:      cc.dopts.dg,
 		tracing: EnableTracing,
 	}
 	if cs.tracing {
@@ -153,6 +163,9 @@
 	p     *parser
 	desc  *StreamDesc
 	codec Codec
+	cp    Compressor
+	cbuf  bytes.Buffer
+	dg    DecompressorGenerator
 
 	tracing bool // set to EnableTracing when the clientStream is created.
 
@@ -198,7 +211,8 @@
 		}
 		err = toRPCErr(err)
 	}()
-	out, err := encode(cs.codec, m, compressionNone)
+	out, err := encode(cs.codec, m, cs.cp, &cs.cbuf)
+	defer cs.cbuf.Reset()
 	if err != nil {
 		return transport.StreamErrorf(codes.Internal, "grpc: %v", err)
 	}
@@ -206,7 +220,7 @@
 }
 
 func (cs *clientStream) RecvMsg(m interface{}) (err error) {
-	err = recv(cs.p, cs.codec, m)
+	err = recv(cs.p, cs.codec, cs.s, cs.dg, m)
 	defer func() {
 		// err != nil indicates the termination of the stream.
 		if err != nil {
@@ -225,7 +239,7 @@
 			return
 		}
 		// Special handling for client streaming rpc.
-		err = recv(cs.p, cs.codec, m)
+		err = recv(cs.p, cs.codec, cs.s, cs.dg, m)
 		cs.closeTransportStream(err)
 		if err == nil {
 			return toRPCErr(errors.New("grpc: client streaming protocol violation: get <nil>, want <EOF>"))
@@ -310,6 +324,9 @@
 	s          *transport.Stream
 	p          *parser
 	codec      Codec
+	cp         Compressor
+	dg         DecompressorGenerator
+	cbuf       bytes.Buffer
 	statusCode codes.Code
 	statusDesc string
 	trInfo     *traceInfo
@@ -348,7 +365,8 @@
 			ss.mu.Unlock()
 		}
 	}()
-	out, err := encode(ss.codec, m, compressionNone)
+	out, err := encode(ss.codec, m, ss.cp, &ss.cbuf)
+	defer ss.cbuf.Reset()
 	if err != nil {
 		err = transport.StreamErrorf(codes.Internal, "grpc: %v", err)
 		return err
@@ -371,5 +389,5 @@
 			ss.mu.Unlock()
 		}
 	}()
-	return recv(ss.p, ss.codec, m)
+	return recv(ss.p, ss.codec, ss.s, ss.dg, m)
 }
diff --git a/test/end2end_test.go b/test/end2end_test.go
index 93944f8..7823ba5 100644
--- a/test/end2end_test.go
+++ b/test/end2end_test.go
@@ -143,7 +143,6 @@
 	if err != nil {
 		return nil, err
 	}
-
 	return &testpb.SimpleResponse{
 		Payload: payload,
 	}, nil
@@ -328,8 +327,8 @@
 	return []env{{"tcp", nil, ""}, {"tcp", nil, "tls"}, {"unix", unixDialer, ""}, {"unix", unixDialer, "tls"}}
 }
 
-func setUp(t *testing.T, hs *health.HealthServer, maxStream uint32, ua string, e env) (s *grpc.Server, cc *grpc.ClientConn) {
-	sopts := []grpc.ServerOption{grpc.MaxConcurrentStreams(maxStream)}
+func serverSetUp(t *testing.T, hs *health.HealthServer, maxStream uint32, cg grpc.CompressorGenerator, dg grpc.DecompressorGenerator, e env) (s *grpc.Server, addr string) {
+	sopts := []grpc.ServerOption{grpc.MaxConcurrentStreams(maxStream), grpc.CompressON(cg), grpc.DecompressON(dg)}
 	la := ":0"
 	switch e.network {
 	case "unix":
@@ -353,7 +352,7 @@
 	}
 	testpb.RegisterTestServiceServer(s, &testServer{security: e.security})
 	go s.Serve(lis)
-	addr := la
+	addr = la
 	switch e.network {
 	case "unix":
 	default:
@@ -363,17 +362,22 @@
 		}
 		addr = "localhost:" + port
 	}
+	return
+}
+
+func clientSetUp(t *testing.T, addr string, cg grpc.CompressorGenerator, dg grpc.DecompressorGenerator, ua string, e env) (cc *grpc.ClientConn) {
+	var derr error
 	if e.security == "tls" {
 		creds, err := credentials.NewClientTLSFromFile(tlsDir+"ca.pem", "x.test.youtube.com")
 		if err != nil {
 			t.Fatalf("Failed to create credentials %v", err)
 		}
-		cc, err = grpc.Dial(addr, grpc.WithTransportCredentials(creds), grpc.WithDialer(e.dialer), grpc.WithUserAgent(ua))
+		cc, derr = grpc.Dial(addr, grpc.WithTransportCredentials(creds), grpc.WithDialer(e.dialer), grpc.WithUserAgent(ua), grpc.WithCompressor(cg), grpc.WithDecompressor(dg))
 	} else {
-		cc, err = grpc.Dial(addr, grpc.WithDialer(e.dialer), grpc.WithInsecure(), grpc.WithUserAgent(ua))
+		cc, derr = grpc.Dial(addr, grpc.WithDialer(e.dialer), grpc.WithInsecure(), grpc.WithUserAgent(ua), grpc.WithCompressor(cg), grpc.WithDecompressor(dg))
 	}
-	if err != nil {
-		t.Fatalf("Dial(%q) = %v", addr, err)
+	if derr != nil {
+		t.Fatalf("Dial(%q) = %v", addr, derr)
 	}
 	return
 }
@@ -390,7 +394,8 @@
 }
 
 func testTimeoutOnDeadServer(t *testing.T, e env) {
-	s, cc := setUp(t, nil, math.MaxUint32, "", e)
+	s, addr := serverSetUp(t, nil, math.MaxUint32, nil, nil, e)
+	cc := clientSetUp(t, addr, nil, nil, "", e)
 	tc := testpb.NewTestServiceClient(cc)
 	ctx, _ := context.WithTimeout(context.Background(), time.Second)
 	if _, err := cc.WaitForStateChange(ctx, grpc.Idle); err != nil {
@@ -443,7 +448,8 @@
 func testHealthCheckOnSuccess(t *testing.T, e env) {
 	hs := health.NewHealthServer()
 	hs.SetServingStatus("grpc.health.v1alpha.Health", 1)
-	s, cc := setUp(t, hs, math.MaxUint32, "", e)
+	s, addr := serverSetUp(t, hs, math.MaxUint32, nil, nil, e)
+	cc := clientSetUp(t, addr, nil, nil, "", e)
 	defer tearDown(s, cc)
 	if _, err := healthCheck(1*time.Second, cc, "grpc.health.v1alpha.Health"); err != nil {
 		t.Fatalf("Health/Check(_, _) = _, %v, want _, <nil>", err)
@@ -459,7 +465,8 @@
 func testHealthCheckOnFailure(t *testing.T, e env) {
 	hs := health.NewHealthServer()
 	hs.SetServingStatus("grpc.health.v1alpha.HealthCheck", 1)
-	s, cc := setUp(t, hs, math.MaxUint32, "", e)
+	s, addr := serverSetUp(t, hs, math.MaxUint32, nil, nil, e)
+	cc := clientSetUp(t, addr, nil, nil, "", e)
 	defer tearDown(s, cc)
 	if _, err := healthCheck(0*time.Second, cc, "grpc.health.v1alpha.Health"); err != grpc.Errorf(codes.DeadlineExceeded, "context deadline exceeded") {
 		t.Fatalf("Health/Check(_, _) = _, %v, want _, error code %d", err, codes.DeadlineExceeded)
@@ -473,7 +480,8 @@
 }
 
 func testHealthCheckOff(t *testing.T, e env) {
-	s, cc := setUp(t, nil, math.MaxUint32, "", e)
+	s, addr := serverSetUp(t, nil, math.MaxUint32, nil, nil, e)
+	cc := clientSetUp(t, addr, nil, nil, "", e)
 	defer tearDown(s, cc)
 	if _, err := healthCheck(1*time.Second, cc, ""); err != grpc.Errorf(codes.Unimplemented, "unknown service grpc.health.v1alpha.Health") {
 		t.Fatalf("Health/Check(_, _) = _, %v, want _, error code %d", err, codes.Unimplemented)
@@ -488,7 +496,8 @@
 
 func testHealthCheckServingStatus(t *testing.T, e env) {
 	hs := health.NewHealthServer()
-	s, cc := setUp(t, hs, math.MaxUint32, "", e)
+	s, addr := serverSetUp(t, hs, math.MaxUint32, nil, nil, e)
+	cc := clientSetUp(t, addr, nil, nil, "", e)
 	defer tearDown(s, cc)
 	out, err := healthCheck(1*time.Second, cc, "")
 	if err != nil {
@@ -526,7 +535,8 @@
 }
 
 func testEmptyUnaryWithUserAgent(t *testing.T, e env) {
-	s, cc := setUp(t, nil, math.MaxUint32, testAppUA, e)
+	s, addr := serverSetUp(t, nil, math.MaxUint32, nil, nil, e)
+	cc := clientSetUp(t, addr, nil, nil, testAppUA, e)
 	// Wait until cc is connected.
 	ctx, _ := context.WithTimeout(context.Background(), time.Second)
 	if _, err := cc.WaitForStateChange(ctx, grpc.Idle); err != nil {
@@ -569,7 +579,8 @@
 }
 
 func testFailedEmptyUnary(t *testing.T, e env) {
-	s, cc := setUp(t, nil, math.MaxUint32, "", e)
+	s, addr := serverSetUp(t, nil, math.MaxUint32, nil, nil, e)
+	cc := clientSetUp(t, addr, nil, nil, "", e)
 	tc := testpb.NewTestServiceClient(cc)
 	defer tearDown(s, cc)
 	ctx := metadata.NewContext(context.Background(), testMetadata)
@@ -585,7 +596,8 @@
 }
 
 func testLargeUnary(t *testing.T, e env) {
-	s, cc := setUp(t, nil, math.MaxUint32, "", e)
+	s, addr := serverSetUp(t, nil, math.MaxUint32, nil, nil, e)
+	cc := clientSetUp(t, addr, nil, nil, "", e)
 	tc := testpb.NewTestServiceClient(cc)
 	defer tearDown(s, cc)
 	argSize := 271828
@@ -619,7 +631,8 @@
 }
 
 func testMetadataUnaryRPC(t *testing.T, e env) {
-	s, cc := setUp(t, nil, math.MaxUint32, "", e)
+	s, addr := serverSetUp(t, nil, math.MaxUint32, nil, nil, e)
+	cc := clientSetUp(t, addr, nil, nil, "", e)
 	tc := testpb.NewTestServiceClient(cc)
 	defer tearDown(s, cc)
 	argSize := 2718
@@ -684,7 +697,8 @@
 // TODO(zhaoq): Refactor to make this clearer and add more cases to test racy
 // and error-prone paths.
 func testRetry(t *testing.T, e env) {
-	s, cc := setUp(t, nil, math.MaxUint32, "", e)
+	s, addr := serverSetUp(t, nil, math.MaxUint32, nil, nil, e)
+	cc := clientSetUp(t, addr, nil, nil, "", e)
 	tc := testpb.NewTestServiceClient(cc)
 	defer tearDown(s, cc)
 	var wg sync.WaitGroup
@@ -714,7 +728,8 @@
 
 // TODO(zhaoq): Have a better test coverage of timeout and cancellation mechanism.
 func testRPCTimeout(t *testing.T, e env) {
-	s, cc := setUp(t, nil, math.MaxUint32, "", e)
+	s, addr := serverSetUp(t, nil, math.MaxUint32, nil, nil, e)
+	cc := clientSetUp(t, addr, nil, nil, "", e)
 	tc := testpb.NewTestServiceClient(cc)
 	defer tearDown(s, cc)
 	argSize := 2718
@@ -746,7 +761,8 @@
 }
 
 func testCancel(t *testing.T, e env) {
-	s, cc := setUp(t, nil, math.MaxUint32, "", e)
+	s, addr := serverSetUp(t, nil, math.MaxUint32, nil, nil, e)
+	cc := clientSetUp(t, addr, nil, nil, "", e)
 	tc := testpb.NewTestServiceClient(cc)
 	defer tearDown(s, cc)
 	argSize := 2718
@@ -778,7 +794,8 @@
 
 func testCancelNoIO(t *testing.T, e env) {
 	// Only allows 1 live stream per server transport.
-	s, cc := setUp(t, nil, 1, "", e)
+	s, addr := serverSetUp(t, nil, 1, nil, nil, e)
+	cc := clientSetUp(t, addr, nil, nil, "", e)
 	tc := testpb.NewTestServiceClient(cc)
 	defer tearDown(s, cc)
 	ctx, cancel := context.WithCancel(context.Background())
@@ -829,7 +846,8 @@
 }
 
 func testPingPong(t *testing.T, e env) {
-	s, cc := setUp(t, nil, math.MaxUint32, "", e)
+	s, addr := serverSetUp(t, nil, math.MaxUint32, nil, nil, e)
+	cc := clientSetUp(t, addr, nil, nil, "", e)
 	tc := testpb.NewTestServiceClient(cc)
 	defer tearDown(s, cc)
 	stream, err := tc.FullDuplexCall(context.Background())
@@ -886,7 +904,8 @@
 }
 
 func testMetadataStreamingRPC(t *testing.T, e env) {
-	s, cc := setUp(t, nil, math.MaxUint32, "", e)
+	s, addr := serverSetUp(t, nil, math.MaxUint32, nil, nil, e)
+	cc := clientSetUp(t, addr, nil, nil, "", e)
 	tc := testpb.NewTestServiceClient(cc)
 	defer tearDown(s, cc)
 	ctx := metadata.NewContext(context.Background(), testMetadata)
@@ -952,7 +971,8 @@
 }
 
 func testServerStreaming(t *testing.T, e env) {
-	s, cc := setUp(t, nil, math.MaxUint32, "", e)
+	s, addr := serverSetUp(t, nil, math.MaxUint32, nil, nil, e)
+	cc := clientSetUp(t, addr, nil, nil, "", e)
 	tc := testpb.NewTestServiceClient(cc)
 	defer tearDown(s, cc)
 	respParam := make([]*testpb.ResponseParameters, len(respSizes))
@@ -1004,7 +1024,8 @@
 }
 
 func testFailedServerStreaming(t *testing.T, e env) {
-	s, cc := setUp(t, nil, math.MaxUint32, "", e)
+	s, addr := serverSetUp(t, nil, math.MaxUint32, nil, nil, e)
+	cc := clientSetUp(t, addr, nil, nil, "", e)
 	tc := testpb.NewTestServiceClient(cc)
 	defer tearDown(s, cc)
 	respParam := make([]*testpb.ResponseParameters, len(respSizes))
@@ -1034,7 +1055,8 @@
 }
 
 func testClientStreaming(t *testing.T, e env) {
-	s, cc := setUp(t, nil, math.MaxUint32, "", e)
+	s, addr := serverSetUp(t, nil, math.MaxUint32, nil, nil, e)
+	cc := clientSetUp(t, addr, nil, nil, "", e)
 	tc := testpb.NewTestServiceClient(cc)
 	defer tearDown(s, cc)
 	stream, err := tc.StreamingInputCall(context.Background())
@@ -1074,7 +1096,8 @@
 
 func testExceedMaxStreamsLimit(t *testing.T, e env) {
 	// Only allows 1 live stream per server transport.
-	s, cc := setUp(t, nil, 1, "", e)
+	s, addr := serverSetUp(t, nil, 1, nil, nil, e)
+	cc := clientSetUp(t, addr, nil, nil, "", e)
 	tc := testpb.NewTestServiceClient(cc)
 	defer tearDown(s, cc)
 	_, err := tc.StreamingInputCall(context.Background())
@@ -1095,3 +1118,109 @@
 		t.Fatalf("%v.StreamingInputCall(_) = _, %v, want _, %d", tc, err, codes.DeadlineExceeded)
 	}
 }
+
+func TestCompressServerHasNoSupport(t *testing.T) {
+	for _, e := range listTestEnv() {
+		testCompressServerHasNoSupport(t, e)
+	}
+}
+
+func testCompressServerHasNoSupport(t *testing.T, e env) {
+	s, addr := serverSetUp(t, nil, math.MaxUint32, nil, nil, e)
+	cc := clientSetUp(t, addr, grpc.NewGZIPCompressor, nil, "", e)
+	// Unary call
+	tc := testpb.NewTestServiceClient(cc)
+	defer tearDown(s, cc)
+	argSize := 271828
+	respSize := 314159
+	payload, err := newPayload(testpb.PayloadType_COMPRESSABLE, int32(argSize))
+	if err != nil {
+		t.Fatal(err)
+	}
+	req := &testpb.SimpleRequest{
+		ResponseType: testpb.PayloadType_COMPRESSABLE.Enum(),
+		ResponseSize: proto.Int32(int32(respSize)),
+		Payload:      payload,
+	}
+	if _, err := tc.UnaryCall(context.Background(), req); err == nil || grpc.Code(err) != codes.InvalidArgument {
+		t.Fatalf("TestService/UnaryCall(_, _) = _, %v, want _, error code %d", err, codes.InvalidArgument)
+	}
+	// Streaming RPC
+	stream, err := tc.FullDuplexCall(context.Background())
+	if err != nil {
+		t.Fatalf("%v.FullDuplexCall(_) = _, %v, want <nil>", tc, err)
+	}
+	respParam := []*testpb.ResponseParameters{
+		{
+			Size: proto.Int32(31415),
+		},
+	}
+	payload, err = newPayload(testpb.PayloadType_COMPRESSABLE, int32(31415))
+	if err != nil {
+		t.Fatal(err)
+	}
+	sreq := &testpb.StreamingOutputCallRequest{
+		ResponseType:       testpb.PayloadType_COMPRESSABLE.Enum(),
+		ResponseParameters: respParam,
+		Payload:            payload,
+	}
+	if err := stream.Send(sreq); err != nil {
+		t.Fatalf("%v.Send(%v) = %v, want <nil>", stream, sreq, err)
+	}
+	if _, err := stream.Recv(); err == nil || grpc.Code(err) != codes.InvalidArgument {
+		t.Fatalf("%v.Recv() = %v, want error code %d", stream, err, codes.InvalidArgument)
+	}
+}
+
+func TestCompressOK(t *testing.T) {
+	for _, e := range listTestEnv() {
+		testCompressOK(t, e)
+	}
+}
+
+func testCompressOK(t *testing.T, e env) {
+	s, addr := serverSetUp(t, nil, math.MaxUint32, grpc.NewGZIPCompressor, grpc.NewGZIPDecompressor, e)
+	cc := clientSetUp(t, addr, grpc.NewGZIPCompressor, grpc.NewGZIPDecompressor, "", e)
+	// Unary call
+	tc := testpb.NewTestServiceClient(cc)
+	defer tearDown(s, cc)
+	argSize := 271828
+	respSize := 314159
+	payload, err := newPayload(testpb.PayloadType_COMPRESSABLE, int32(argSize))
+	if err != nil {
+		t.Fatal(err)
+	}
+	req := &testpb.SimpleRequest{
+		ResponseType: testpb.PayloadType_COMPRESSABLE.Enum(),
+		ResponseSize: proto.Int32(int32(respSize)),
+		Payload:      payload,
+	}
+	if _, err := tc.UnaryCall(context.Background(), req); err != nil {
+		t.Fatalf("TestService/UnaryCall(_, _) = _, %v, want _, <nil>", err)
+	}
+	// Streaming RPC
+	stream, err := tc.FullDuplexCall(context.Background())
+	if err != nil {
+		t.Fatalf("%v.FullDuplexCall(_) = _, %v, want <nil>", tc, err)
+	}
+	respParam := []*testpb.ResponseParameters{
+		{
+			Size: proto.Int32(31415),
+		},
+	}
+	payload, err = newPayload(testpb.PayloadType_COMPRESSABLE, int32(31415))
+	if err != nil {
+		t.Fatal(err)
+	}
+	sreq := &testpb.StreamingOutputCallRequest{
+		ResponseType:       testpb.PayloadType_COMPRESSABLE.Enum(),
+		ResponseParameters: respParam,
+		Payload:            payload,
+	}
+	if err := stream.Send(sreq); err != nil {
+		t.Fatalf("%v.Send(%v) = %v, want <nil>", stream, sreq, err)
+	}
+	if _, err := stream.Recv(); err != nil {
+		t.Fatalf("%v.Recv() = %v, want <nil>", stream, err)
+	}
+}
diff --git a/transport/http2_client.go b/transport/http2_client.go
index 9eae37d..a23f6a7 100644
--- a/transport/http2_client.go
+++ b/transport/http2_client.go
@@ -208,12 +208,13 @@
 	}
 	// TODO(zhaoq): Handle uint32 overflow of Stream.id.
 	s := &Stream{
-		id:            t.nextID,
-		method:        callHdr.Method,
-		buf:           newRecvBuffer(),
-		fc:            fc,
-		sendQuotaPool: newQuotaPool(int(t.streamSendQuota)),
-		headerChan:    make(chan struct{}),
+		id:             t.nextID,
+		method:         callHdr.Method,
+		sendCompress:   callHdr.SendCompress,
+		buf:            newRecvBuffer(),
+		fc:             fc,
+		sendQuotaPool:  newQuotaPool(int(t.streamSendQuota)),
+		headerChan:     make(chan struct{}),
 	}
 	t.nextID += 2
 	s.windowHandler = func(n int) {
@@ -322,6 +323,9 @@
 	t.hEnc.WriteField(hpack.HeaderField{Name: "user-agent", Value: t.userAgent})
 	t.hEnc.WriteField(hpack.HeaderField{Name: "te", Value: "trailers"})
 
+	if callHdr.SendCompress != "" {
+		t.hEnc.WriteField(hpack.HeaderField{Name: "grpc-encoding", Value: callHdr.SendCompress})
+	}
 	if timeout > 0 {
 		t.hEnc.WriteField(hpack.HeaderField{Name: "grpc-timeout", Value: timeoutEncode(timeout)})
 	}
@@ -694,8 +698,10 @@
 	if !endHeaders {
 		return s
 	}
-
 	s.mu.Lock()
+	if !endStream {
+		s.recvCompress = hDec.state.encoding
+	}
 	if !s.headerDone {
 		if !endStream && len(hDec.state.mdata) > 0 {
 			s.header = hDec.state.mdata
diff --git a/transport/http2_server.go b/transport/http2_server.go
index 98088d9..cce2e12 100644
--- a/transport/http2_server.go
+++ b/transport/http2_server.go
@@ -164,6 +164,7 @@
 	if !endHeaders {
 		return s
 	}
+	s.recvCompress = hDec.state.encoding
 	if hDec.state.timeoutSet {
 		s.ctx, s.cancel = context.WithTimeout(context.TODO(), hDec.state.timeout)
 	} else {
@@ -190,6 +191,7 @@
 		ctx:  s.ctx,
 		recv: s.buf,
 	}
+	s.recvCompress = hDec.state.encoding
 	s.method = hDec.state.method
 	t.mu.Lock()
 	if t.state != reachable {
@@ -446,6 +448,9 @@
 	t.hBuf.Reset()
 	t.hEnc.WriteField(hpack.HeaderField{Name: ":status", Value: "200"})
 	t.hEnc.WriteField(hpack.HeaderField{Name: "content-type", Value: "application/grpc"})
+	if s.sendCompress != "" {
+		t.hEnc.WriteField(hpack.HeaderField{Name: "grpc-encoding", Value: s.sendCompress})
+	}
 	for k, v := range md {
 		for _, entry := range v {
 			t.hEnc.WriteField(hpack.HeaderField{Name: k, Value: entry})
@@ -520,6 +525,9 @@
 		t.hBuf.Reset()
 		t.hEnc.WriteField(hpack.HeaderField{Name: ":status", Value: "200"})
 		t.hEnc.WriteField(hpack.HeaderField{Name: "content-type", Value: "application/grpc"})
+		if s.sendCompress != "" {
+			t.hEnc.WriteField(hpack.HeaderField{Name: "grpc-encoding", Value: s.sendCompress})
+		}
 		p := http2.HeadersFrameParam{
 			StreamID:      s.id,
 			BlockFragment: t.hBuf.Bytes(),
diff --git a/transport/http_util.go b/transport/http_util.go
index fec4e47..f9d9fdf 100644
--- a/transport/http_util.go
+++ b/transport/http_util.go
@@ -89,6 +89,7 @@
 // Records the states during HPACK decoding. Must be reset once the
 // decoding of the entire headers are finished.
 type decodeState struct {
+	encoding string
 	// statusCode caches the stream status received from the trailer
 	// the server sent. Client side only.
 	statusCode codes.Code
@@ -145,6 +146,8 @@
 				d.err = StreamErrorf(codes.FailedPrecondition, "transport: received the unexpected header")
 				return
 			}
+		case "grpc-encoding":
+			d.state.encoding = f.Value
 		case "grpc-status":
 			code, err := strconv.Atoi(f.Value)
 			if err != nil {
diff --git a/transport/transport.go b/transport/transport.go
index e1e7f57..9d6f464 100644
--- a/transport/transport.go
+++ b/transport/transport.go
@@ -171,6 +171,8 @@
 	cancel context.CancelFunc
 	// method records the associated RPC method of the stream.
 	method    string
+	recvCompress string
+	sendCompress  string
 	buf       *recvBuffer
 	dec       io.Reader
 	fc        *inFlow
@@ -201,6 +203,14 @@
 	statusDesc string
 }
 
+func (s *Stream) RecvCompress() string {
+	return s.recvCompress
+}
+
+func (s *Stream) SetSendCompress(str string) {
+	s.sendCompress = str
+}
+
 // Header acquires the key-value pairs of header metadata once it
 // is available. It blocks until i) the metadata is ready or ii) there is no
 // header metadata or iii) the stream is cancelled/expired.
@@ -350,6 +360,8 @@
 type CallHdr struct {
 	Host   string // peer host
 	Method string // the operation to perform on the specified host
+	RecvCompress string
+	SendCompress string
 }
 
 // ClientTransport is the common interface for all gRPC client side transport