Compression is Photoshop's way of reducing the size of a document file. Kind of like the ultimate weight-loss program… just click a button, and the file is half its original size. Photoshop employs two types of compress schemes: lossy and lossless.
Lossy compression reduces the size of the file by removing color information… information that can never be restored to the saved document. Lossy compression schemes can achieve file reductions of 80 percent or greater.
The lossless method reduces file size by using compression algorithms that reduce the size of a file without removing image information. Lossy methods are used primarily for images displayed in browsers, or Web images. The relatively slow speed of the Internet forces Web designers, to employ lossy compression methods to reduce images down to their smallest values. Lossless methods are used when the reduction of a file is important, but not so much that you would consider removing information. For example, reducing the size of a group of high-quality TIFF images, so they fit on a rewritable CD. Lossless compression methods can reduce files sizes up to 50 percent, or even a bit more.
Both methods compress documents based on the actual image information. For example, images that contain a lot of solid color information would compress quite well using the GIF (Graphics Interchange) or PNG8 formats; where an image with a lot of soft blending colors, such as a photograph, would be best compressed using the JPEG (Joint Photographic Experts Group) format.
Lossy
Lossless