Lossy (Lossless files)
When a digital camera takes a photo, the image data is stored on a memory card as a computer file. If the data is stored fully, the file is called a lossless file. These files are quite large in size. The most common type of lossless file in use are TIFFs.
To cut down on large file sizes, the camera can throw away parts of the data that the human eye probably won’t notice anyway. These files are called lossy. The most common type of lossy file are JPEGs. Caution should be taken when using JPEGs if image quality is important.
NB: mp3 music files work in a similar way. The original, complete music file, is stripped down leaving only the bits that the human ear is sensitive to left behind.
Glossary of Digital Photography Terminology – http://www.digital-photography-tips.net