This paper presents a novel image coding scheme based on separate coding of region and residue sources. In a subband image coding scheme, quantization errors in each subimage spread over the reconstructed image and result in a blurring or a boundary artifact. To obtain high compression ratio without considerable degradation, an input image, in our scheme, is separated into region and residue sources which are coded using different coding schemes. The region source is coded by adaptive arithmetic coder. The residue source is coded using multiresolution subimages generated by applying a subband filter. Each block in the subimages is predicted by an affine transformation of blocks in lower resolution subimages. Experimental results show that a high coding efficiency is achieved using the proposed scheme, especially in terms of the subjective visual quality and PSNR at low bit-rate compression.