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New technological advancements including multislice CT scanners and functional MRI, have dramatically increased the size and number of digital images generated by medical imaging departments. Despite the fact that the cost of storage is dropping, the savings are largely surpassed by the increasing volume of data being generated. While local area network bandwidth within a hospital is adequate for timely access to imaging data, efficiently moving the data between institutions requires wide area network bandwidth, which has a limited availability at a national level. A solution to address those issues is the use of lossy compression as long as there is no loss of relevant information. The goal of this study was to determine levels at which lossy compression can be confidently used in diagnostic imaging applications. In order to provide a fair assessment of existing compression tools, we tested and compared the two most commonly adopted DISCOM compression algorithms: JPEG and JPEG-2000. We conducted an extensive pan-Canadian evaluation of lossy compression applied to seven anatomical areas and five modalities using two recognized techniques: objective methods or diagnostic accuracy and subjective assessment based on Just Noticeable Difference. By incorporating both diagnostic accuracy and subjective evaluation techniques, enabled us to define a range of compression for each modality and body part tested. The results of our study suggest that at low levels of compression, there was no significant difference between the performance of lossy JPEG and lossy JPEG 2000, and that they are both appropriate to use for reporting on medical images. At higher levels, lossy JPEG proved to be more effective than JPEG 2000 in some cases, mainly neuro CT. More evaluation is required to assess the effect of compression on thin slice CT. We provide a table of recommended compression ratios for each modality and anatomical area investigated, to be integrated in the Canadian Association of Radiologists standard for the use of lossy compression in medical imaging. [ABSTRACT FROM AUTHOR]