Traditionally, data hiding and compression have had contradictory goals. The former problem adds perceptually irrelevant information in order to embed data, while the latter removes this irrelevancy and redundancy to reduce storage requirements. In this paper, we use data hiding to help improve signal compression. We take an unconventional approach and consider “piggy-backing” the color information on the luminance component of an image for improved color image coding. Our new technique essentially transforms a given color image into the YIQ color space where the chrominance information is subsampled and embedded in the wavelet domain of the luminance component. Our technique can be used as preprocessing to improve the performance of popular image compression schemes such as SPIHT that are optimized for grayscale image compression. Simulation results demonstrate the superior performance of the proposed technique in comparison to JPEG and straightforward SPIHT.