This is part 2 of our article on image storage and compression, the third article of our series for radiologists and imaging scientists on displaying, manipulating, and analyzing radiologic images on personal computers. Image compression is classified as lossless (nondestructive) or lossy (destructive). Common lossless compression algorithms include variable-length bit codes (Huffman codes and variants), dictionary-based compression (Lempel-Ziv variants), and arithmetic coding. Huffman codes and the Lempel-Ziv-Welch (LZW) algorithm are commonly used for image compression. All of these compression methods are enhanced if the image has been transformed into a differential image based on a differential pulse-code modulation (DPCM) algorithm. The LZW compression after the DPCM image transformation performed the best on our example images, and performed almost as well as the best of the three commercial compression programs tested. Lossy compression techniques are capable of much higher data compression, but reduced image quality and compression artifacts may be noticeable. Lossy compression is comprised of three steps: transformation, quantization, and coding. Two commonly used transformation methods are the discrete cosine transformation and discrete wavelet transformation. In both methods, most of the image information is contained in a relatively few of the transformation coefficients. The quantization step reduces many of the lower order coefficients to 0, which greatly improves the efficiency of the coding (compression) step. In fractal-based image compression, image patterns are stored as equations that can be reconstructed at different levels of resolution.