A method and apparatus for processing images using gray scale techniques includes means (40) for obtaining a histogram of levels in an image; means (42) for analyzing said histogram to identify one or more ranges of background in said image; means (44, 48, 52) for converting each of said ranges of background to a constant value to achieve flat backgrounds in said image; means for generating a dynamic range expansion table for each image; means for correcting said image data for dynamic range compression due to coring during processing of said image data by reference to said dynamic range expansion table. The process may also include means for encoding (54) said processed image using gray scale encoding techniques, means (46) for filtering all nonbackground pixels in said image, means for generating for said image a shading correction for each pixel in said image; means for correcting each pixel for shading employing said shading correction generated for each pixel, means for determining if said image is a graphics image; means for generating a dynamic range expansion table for each graphics image; means for correcting said image data for dynamic range compression by reference to said dynamic range expansion table, means for creating a second table of values from parameters contained in said encoded image data; and means for translating decoded image pixel values by reference to said second table to correct for quantization noise.