A transform trellis coding scheme is used to encode images at rates below 1 b/pel, resulting in high SNR values and very good subjective performance. A discrete cosine transform (DCT) is used to decorrelate the data samples, and a trellis encoder is used to encode the transformed coefficients. To overcome image nonstationarity, a clustering algorithm is used to segment the transformed image into distinct regions and a separate trellis diagram is then constructed for each cluster. To further improve the image quality, particularly to reduce the blocking effect, a scalar quantizer is used to quantize large-magnitude coefficients of the error image in the transform domain. The performance of the proposed scheme is found to be better than that of other recently reported schemes.>