This paper proposes an image compression algorithm that adopts projection scheme on mean-residual metod. Sub-blocks of an image are encoded using mean-residual method where mean value is predicted according to that of neighboring blocks. Projection scheme with 8 directions is applied to the compression of residual signals of blocks. Projection vectors are finite-state vector quantized according to the projection angle of nighboring blocks in order to exploit the correlation among them. Side information to represent the repetition of projection is run-length coded while the information for projection direction is compressed using entropy encoding. The proposed scheme apears to be better in PSNR performance when compared with conventional projection scheme as well as in subjective quality preserving the edges of images better than most tranform methods which usually require heavy computation load.