Distributed Video Coding (DVC) is an emerging video coding paradigm that is characterized by a flexible architecture for designing very low cost video encoders. This feature could be very effectively utilized in a number of potential many-to-one type video coding applications. However, the compression efficiency of the latest DVC implementations still falls behind the state-of-the-art in conventional video coding technologies, namely H.264/AVC. In this paper, a novel non-linear quantization algorithm is proposed for DVC in order to improve the rate-distortion (RD) performance. The proposed solution is expected to exploit the dominant contribution to the picture quality from the relatively small coefficients when the high concentration of the coefficients near zero as evident when the residual input video signal for the Wyner-Ziv frames is considered in the transform domain. The performance of the proposed solution incorporating the non-linear quantizer is compared with the performance of an existing transform domain DVC solution that uses a linear quantizer. The simulation results show a consistently improved RD performance at all bitrates when different test video sequences with varying motion levels are considered.