Data Compression : Lossy and Lossless

Lossless compression lets you recreate the original file exactly

LZ adaptive dictionary-based algorithm is a well known example

Breaking a file into a "smaller" form for transmission or storage and then putting it back together on the other end so it can be used again.

works well ( good "file-reduction ratio" ) with text file, and programming source

far less efficient with complex data like sound or bitmap pictures

Lossy compression eliminate "unnecessary" bits of information

E.g. : the sky in a picture is blue, but most of the pixels are with a different blue.

The compression codec would chose an average blue and apply it to the pixels not to far from that average value.

No way to get the lost information back after such an alteration

You are not supposed to notice the change

This sort of compression can't be use for anything that needs to be reproduced exactly

Source: http://computer.howstuffworks.com/file-compression1.htm