One main focus of research in stereo image coding has been disparity estimation, a technique used to reduce the coding rate by taking advantage of the redundancy in a stereo image pair. Significantly less effort has been put into the coding of the residual image. These images display characteristics that are different from that of natural images. We propose a new method for the coding of residual images that takes into account the properties of residual images. Particular attention is paid to the effects of occlusion and the correlation properties of residual images that result from block-based disparity estimation. The embedded, progressive nature of our coder enables one to stop decoding at any time. We demonstrate that it is possible to achieve good results with a computationally simple method.