A new image coder is presented in which an image is divided into blocks, each block is quadtree segmented, and each segment is coded using a form of predictive coding. We provide nearly-optimal segmentation and quantization rules for this framework, as well as an iterative codebook design algorithm. In simulations, our new system comes within 1 dB of JPEG 2000 and outperforms JPEG by about 1.5 dB at moderate rates and up to 4.5 dB at low rates. Additionally, our method captures edges better and has potentially lower complexity than transform-based methods.