An information-theoretic model for image watermarking and data hiding systems is presented. The fundamental capacity limits of these systems are determined by the statistical model used for the host image, by the distortion constraints on the data hider and the attacker, and by the information available to the data hider, to the attacker, and to the decoder. We consider wavelet statistical models for images and compute the data hiding capacity for compressed and uncompressed host image sources. Closed form expressions are obtained under sparse-model approximations.