In this paper, a novel VQ-based digital image watermarking scheme is proposed. During the encoding process of the VQ compression technique, the proposed scheme embeds a representative digital watermark in the protected image so that the watermark can be retrieved from the image to effectively prove which party is in legal possession of the copyright in case an ownership dispute arises. In our method, the codewords in the VQ codebook are classified into different groups according to different characteristics and then each binary watermark bit is embedded into the selected VQ encoded block. The main feature of the proposed scheme is that the watermark exists both in the VQ compressed image and in the reconstructed image after VQ decoding. Because the watermark is hidden inside the compressed image, which is much smaller in size, much transmission time and storage space can be saved when the compressed data, instead of the original form, are transmitted over the Internet. Furthermore, the reconstructed image has robustness against aggressive image processing. The embedded watermark can even survive JPEG lossy compression.