For any automated distress inspection system, typically a huge number of pavement images are collected. Use of an appropriate image compression algorithm can save disk space, reduce the saving time, increase the inspection distance, and increase the processing speed. In this research, a modified EZW (Embedded Zero-tree Wavelet) coding method, which is an improved version of the widely used EZW coding method, is proposed. This method, unlike the two-pass approach used in the original EZW method, uses only one pass to encode both the coordinates and magnitudes of wavelet coefficients. An adaptive arithmetic encoding method is also implemented to encode four symbols assigned by the modified EZW into binary bits. By applying a thresholding technique to terminate the coding process, the modified EZW coding method can compress the image and reduce noise simultaneously. The new method is much simpler and faster. Experimental results also show that the compression ratio was increased one and one-half times compared to the EZW coding method. The compressed and de-noised data can be used to reconstruct wavelet coefficients for off-line pavement image processing such as distress classification and quantification.