This paper describes source encoding of the outputs of a block truncation coder (BTC), namely, the overhead statistical information and the truncated block. The statistical overhead and the truncated block exhibit properties which can be effectively used for their quantization as vectors. Vector quantization of these BTC outputs results into reduction of the bit rate of the coder. The bit rate reduces up to 1.5 bits/ pel if vector quantization is used on one of the outputs; i.e., either the overhead information or the truncated block. By vector quantizing both the BTC outputs the bit rate can he reduced up to 1.0 bits/pel without introducing many perceivable errors in the reconstructed output.