A digital holographic data reconstruction method with data compression is proposed. We show the number of quantization level of a digital hologram can be reduced. By computer simulations it is confirmed that the method is especially useful for binary images. For gray scale images, we propose a bit plane decomposition method. By this method, we show both high reconstructed image quality and a high compression ratio can be achieved. This method is applicable to both a normal digital hologram and an encrypted digital hologram.© (2001) COPYRIGHT SPIE--The International Society for Optical Engineering. Downloading of the abstract is permitted for personal use only.