Let <tex xmlns:mml="http://www.w3.org/1998/Math/MathML" xmlns:xlink="http://www.w3.org/1999/xlink">\{(X_{k}, Y_{k}) \}^{ \infty}_{k=1}</tex> be a sequence of independent drawings of a pair of dependent random variables <tex xmlns:mml="http://www.w3.org/1998/Math/MathML" xmlns:xlink="http://www.w3.org/1999/xlink">X, Y</tex> . Let us say that <tex xmlns:mml="http://www.w3.org/1998/Math/MathML" xmlns:xlink="http://www.w3.org/1999/xlink">X</tex> takes values in the finite set <tex xmlns:mml="http://www.w3.org/1998/Math/MathML" xmlns:xlink="http://www.w3.org/1999/xlink">\cal X</tex> . It is desired to encode the sequence <tex xmlns:mml="http://www.w3.org/1998/Math/MathML" xmlns:xlink="http://www.w3.org/1999/xlink">\{X_{k}\}</tex> in blocks of length n into a binary stream of rate <tex xmlns:mml="http://www.w3.org/1998/Math/MathML" xmlns:xlink="http://www.w3.org/1999/xlink">R</tex> , which can in turn be decoded as a sequence <tex xmlns:mml="http://www.w3.org/1998/Math/MathML" xmlns:xlink="http://www.w3.org/1999/xlink">\{ \hat{X}_{k} \}</tex> , where <tex xmlns:mml="http://www.w3.org/1998/Math/MathML" xmlns:xlink="http://www.w3.org/1999/xlink">\hat{X}_{k} \in \hat{ \cal X}</tex> , the reproduction alphabet. The average distortion level is <tex xmlns:mml="http://www.w3.org/1998/Math/MathML" xmlns:xlink="http://www.w3.org/1999/xlink">(1/n) \sum^{n}_{k=1} E[D(X_{k},\hat{X}_{k})]</tex> , where <tex xmlns:mml="http://www.w3.org/1998/Math/MathML" xmlns:xlink="http://www.w3.org/1999/xlink">D(x,\hat{x}) \geq 0, x \in {\cal X}, \hat{x} \in \hat{ \cal X}</tex> , is a preassigned distortion measure. The special assumption made here is that the decoder has access to the side information <tex xmlns:mml="http://www.w3.org/1998/Math/MathML" xmlns:xlink="http://www.w3.org/1999/xlink">\{Y_{k}\}</tex> . In this paper we determine the quantity <tex xmlns:mml="http://www.w3.org/1998/Math/MathML" xmlns:xlink="http://www.w3.org/1999/xlink">R \ast (d)</tex> , defined as the infimum ofrates <tex xmlns:mml="http://www.w3.org/1998/Math/MathML" xmlns:xlink="http://www.w3.org/1999/xlink">R</tex> such that (with <tex xmlns:mml="http://www.w3.org/1998/Math/MathML" xmlns:xlink="http://www.w3.org/1999/xlink">\varepsilon > 0</tex> arbitrarily small and with suitably large <tex xmlns:mml="http://www.w3.org/1998/Math/MathML" xmlns:xlink="http://www.w3.org/1999/xlink">n</tex> )communication is possible in the above setting at an average distortion level (as defined above) not exceeding <tex xmlns:mml="http://www.w3.org/1998/Math/MathML" xmlns:xlink="http://www.w3.org/1999/xlink">d + \varepsilon</tex> . The main result is that <tex xmlns:mml="http://www.w3.org/1998/Math/MathML" xmlns:xlink="http://www.w3.org/1999/xlink">R \ast (d) = \inf [I(X;Z) - I(Y;Z)]</tex> , where the infimum is with respect to all auxiliary random variables <tex xmlns:mml="http://www.w3.org/1998/Math/MathML" xmlns:xlink="http://www.w3.org/1999/xlink">Z</tex> (which take values in a finite set <tex xmlns:mml="http://www.w3.org/1998/Math/MathML" xmlns:xlink="http://www.w3.org/1999/xlink">\cal Z</tex> ) that satisfy: i) <tex xmlns:mml="http://www.w3.org/1998/Math/MathML" xmlns:xlink="http://www.w3.org/1999/xlink">Y,Z</tex> conditionally independent given <tex xmlns:mml="http://www.w3.org/1998/Math/MathML" xmlns:xlink="http://www.w3.org/1999/xlink">X</tex> ; ii) there exists a function <tex xmlns:mml="http://www.w3.org/1998/Math/MathML" xmlns:xlink="http://www.w3.org/1999/xlink">f: {\cal Y} \times {\cal Z} \rightarrow \hat{ \cal X}</tex> , such that <tex xmlns:mml="http://www.w3.org/1998/Math/MathML" xmlns:xlink="http://www.w3.org/1999/xlink">E[D(X,f(Y,Z))] \leq d</tex> . Let <tex xmlns:mml="http://www.w3.org/1998/Math/MathML" xmlns:xlink="http://www.w3.org/1999/xlink">R_{X | Y}(d)</tex> be the rate-distortion function which results when the encoder as well as the decoder has access to the side information <tex xmlns:mml="http://www.w3.org/1998/Math/MathML" xmlns:xlink="http://www.w3.org/1999/xlink">\{ Y_{k} \}</tex> . In nearly all cases it is shown that when <tex xmlns:mml="http://www.w3.org/1998/Math/MathML" xmlns:xlink="http://www.w3.org/1999/xlink">d > 0</tex> then <tex xmlns:mml="http://www.w3.org/1998/Math/MathML" xmlns:xlink="http://www.w3.org/1999/xlink">R \ast(d) > R_{X|Y} (d)</tex> , so that knowledge of the side information at the encoder permits transmission of the <tex xmlns:mml="http://www.w3.org/1998/Math/MathML" xmlns:xlink="http://www.w3.org/1999/xlink">\{X_{k}\}</tex> at a given distortion level using a smaller transmission rate. This is in contrast to the situation treated by Slepian and Wolf [5] where, for arbitrarily accurate reproduction of <tex xmlns:mml="http://www.w3.org/1998/Math/MathML" xmlns:xlink="http://www.w3.org/1999/xlink">\{X_{k}\}</tex> , i.e., <tex xmlns:mml="http://www.w3.org/1998/Math/MathML" xmlns:xlink="http://www.w3.org/1999/xlink">d = \varepsilon</tex> for any <tex xmlns:mml="http://www.w3.org/1998/Math/MathML" xmlns:xlink="http://www.w3.org/1999/xlink">\varepsilon >0</tex> , knowledge of the side information at the encoder does not allow a reduction of the transmission rate.