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Data hiding is a serious topic for secret deliveries of confidential data through an unreliable computer network. Image is a useful media for covering secret data to achieve the purpose of delivering confidential data covertly. The techniques in the compression domain not only effectively reduce the size of image but also embed the confidential data into the compressed data. DWT based state-codebook search algorithm for vector quantization has better compression performance than side-match vector quantization for images with complex contents. The proposed method utilizes DWT based state-codebook search algorithm to reduce the size of image and embedding the secret data into the compressed image. In our design, unauthorized users cannot to know the secret data from stego-image without the decryption key. The experiment results showed that the proposed method successful embedded the secret data and maintained the visual quality of stego-image.