The aim of this dissertation is to develop a new algorithm to embed a watermark in JPEG compressed images, using encoding methods. This encompasses the embedding of proprietary information, such as identity and authentication bitstrings, into the compressed material. This watermark encoding scheme involves combining entropy coding with homophonic coding, in order to embed a watermark in a JPEG image. Arithmetic coding was used as the entropy encoder for this scheme. It is often desired to obtain a robust digital watermarking method that does not distort the digital image, even if this implies that the image is slightly expanded in size before final compression. In this dissertation an algorithm that combines homophonic and arithmetic coding for JPEG images was developed and implemented in software. A detailed analysis of this algorithm is given and the compression (in number of bits) obtained when using the newly developed algorithm (homophonic and arithmetic coding). This research shows that homophonic coding can be used to embed a watermark in a JPEG image by using the watermark information for the selection of the homophones. The proposed algorithm can thus be viewed as a ‘key-less’ encryption technique, where an external bitstring is used as a ‘key’ and is embedded intrinsically into the message stream. The algorithm has achieved to create JPEG images with minimal distortion, with Peak Signal to Noise Ratios (PSNR) of above 35dB. The resulting increase in the entropy of the file is within the expected 2 bits per symbol. This research endeavor consequently provides a unique watermarking technique for images compressed using the JPEG standard. / Dissertation (MEng)--University of Pretoria, 2008. / Electrical, Electronic and Computer Engineering / unrestricted