A new tree code is introduced for discrete-time stationary Gaussian sources with hounded, integrable power spectra and the squared-error distortion measure. The codewords in the tree are reconstructions of Karhunen-Loève transforms of the source words. The branching factor and the number of code letters per branch may vary with level in the tree. A theorem that guarantees the existence of an optimal code for any code rate using such a tree is proved. The proof uses the random coding argument in conjunction with a theorem on survival of a branching process with random environment. A suboptimal but computationally affordable realization of the theorem's coding technique was used for encoding simulations for six autoregressive sources at rates of1.0, 0.50, 0.25, and0.10bits per source symbol. The average distortion results were generally within1dB of the distortion-rate bound but varied widely depending on the source and rate. The results were compared with those for transform quantization simulations for the same sources and rates. The tree code always performed better but only by an average of0.44dB all sources and rates. Longer source blocks and more intensive search would certainly improve the performance of the tree codes, but at the expense of extra computation and storage.