Abstract. It is well-known that edges contain semantically important image information. In this paper we present a lossy compression method for cartoon-like images that exploits information at image edges. These edges are extracted with the Marr-Hildreth operator followed by hysteresis thresholding. Their locations are stored in a lossless way using JBIG. Moreover, we encode the grey or colour values at both sides of each edge by applying quantisation, subsampling and PAQ coding. In the decoding step, information outside these encoded data is recovered by solving the Laplace equation, i.e. we inpaint with the steady state of a homogeneous diffusion process. Our experiments show that the suggested method outperforms the widely-used JPEG standard and can even beat the advanced JPEG2000 standard for cartoon-like images.