1. A computer readable medium of instructions for processing a digitized image represented by a plurality of luminance and chrominance values comprising; A. means for partitioning the digitized image into non-overlapping contiguous regions; and B. computer readable encoding means for encoding the luminance values within each region with a code that indicates: 1. a base luminance value which is an extremum of the luminance values located along the perimeter of the region; 2. the direction of greatest luminance change from the base luminance value; 3. the total change in luminance from the base luminance value; and 4. the location and type of luminance transition within the region; and wherein the computer readable encoding means employs short, medium-length, and long codes to encode the luminance values and wherein; A. the short code encodes a region's luminance information in m.sub.1 bits which indicate the direction in which luminance varies the greatest amount from the base luminance value of the region and m.sub.2 bits which indicate the region's base luminance value, the short code being employed when the total variation in luminance from the base luminance value of the region is less than a first threshold value; B. the medium-length code encodes a region's luminance information in m.sub.3 bits which indicate the direction in which luminance varies the greatest amount from the base luminance value of the region and m.sub.4 bits which further encode m.sub.5 possible base luminance values, m.sub.6 possible total luminance variations and m.sub.7 possible luminance transition functions, the medium-length code being employed when the total variation in luminance from the base luminance value exceeds the first threshold value and decoded luminance values which employ the medium-length code do not exhibit errors which exceed a second threshold value; and C. the long code encodes the region's luminance information in m.sub.8 bits which indicate the direction along which an associated group of me.sub.0 sets of m.sub.10 bits are to be placed, each me sets of m.sub.10 bits providing a luminance value, the remaining pixels within the region being assigned luminance values in accordance with an error diffusion distribution about the m.sub.9 sets of luminance values, the long code being employed when the total variation in luminance from the base luminance value exceeds the first threshold and decoded luminance values obtained using the medium-length code create errors which exceed the second threshold value.