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The basic goal of medical image compression is to reduce the bit rate and enhance the compression efficiency for the transmission and storage of the medical imagery while maintaining an acceptable diagnostic image quality. Because of the storage, transmission bandwidth and the limitations of the conventional compression methods, the medical imagery need to be compressed selectively to reduce the transmission time and storage cost along with the preservance of the high quality of the image. The other important reason of context based medical image compression is the high spatial resolution and contrast sensitivity requirements. In medical images, contextual region is an area which contains the most useful and important information and must be coded carefully without appreciable distortion. A novel scheme for context based coding is proposed here and yields significantly better compression rates than the general methods of JPEG and JPEG2000. In the proposed method the contextual part of the image is encoded selectively on the high priority basis with a very low compression rate (high bpp) and the background of the image is separately encoded with a low priority and a high compression rate (low bpp). As a result, high over all compression rates, better diagnostic image quality and improved performance parameters (CR, MSE, PSNR and CoC) are obtained. The experimental results have been compared to the Scaling, Maxshift, Implicit and EBCOT methods on ultrasound medical images and it is found that the proposed algorithm gives better and improved results.