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A new image compression approach is proposed in which variable block size technique is adopted, using quadtree decomposition, for coding images at low bit rates. In the proposed approach, low-activity regions, which usually occupy large areas in an image, were coded with a larger block size and the block mean is used to represent each pixel in the block. To preserve edge integrity, the classified vector quantisation (CVQ) technique is used to code high-activity regions. A new edge-oriented classifier without employing any thresholds is proposed for edge classification. A novel predictive noiseless coding (NPNC) method which exploits the redundancy between neighbouring blocks is also presented to efficiently code the mean values of low-activity blocks and the addresses of edge blocks. The bit rates required for coding the mean values and addresses can be significantly reduced by the proposed NPNC method. Experimental results show that excellent reconstructed images and higher PSNR were obtained