Just to add to what's already been said, there are two main types of lossy compression. One, like JPEG and MPEG-1/2, is based on something called the Inverse Cosine transform. Cosine transforms break an image down into small blocks (e.g. 5x5 pixels), and basically creates a concise mapping of the color and shapes contained in that block (and, in the case of motion, stores the intermediate changes between reference frames). The small blocks are apparent when there is noise in the signal of a picture or video signal - it gets blocky and multicolored. The other, which JPEG-2000 and MPEG-4 use, is Wavelet transforms. A wavelet is a complex function that basically mimics the type of shapes and colors through a mapping. Different wavelets are better at compressing different types of video and audio.