A scheme which integrates image compression and image watermarking in an effective way is proposed in this research. The image compression scheme under consideration is EBCOT (Embedded Block Coding with Optimized Truncation) which has been adopted in the verification model (VM) of the emerging JPEG-2000 image compression standard. The watermark is embedded during the process when the compressed bit-stream is formed, and can be detected on the fly in image decoding. Thus, watermark embedding and retrieval can be done very efficiently in comparison with other existing watermarking schemes. In addition to efficiency, the proposed scheme has many interesting features. The embedded watermark is robust against various signal processing attacks such as coding and filtering while the watermarked image maintains good perceptual quality. The watermark retrieval procedure does not require the knowledge of the original image. Furthermore, the watermark can be detected progressively and region of interest (ROI) watermarking can be accomplished easily.