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Due to exponential growth in image sizes, visually lossless coding is increasingly being considered as an alternative to numerically lossless coding, which has limited compression ratios. This paper presents a method of encoding color images in a visually lossless manner using JPEG2000. In order to hide coding artifacts caused by quantization, visibility thresholds (VTs) are measured and used for quantization of subband signals in JPEG2000. The VTs are experimentally determined from statistically modeled quantization distortion, which is based on the distribution of wavelet coefficients and the dead-zone quantizer of JPEG2000. The resulting VTs are adjusted for locally changing backgrounds through a visual masking model, and then used to determine the minimum number of coding passes to be included in the final codestream for visually lossless quality under the desired viewing conditions. Codestreams produced by this scheme are fully JPEG2000 Part-I compliant.