A method and system are provided for reducing the bit depth of grayscale imagery using multi-bit halftoning. The halftoned image data may be lossy or losslessly compressed and stored in memory or transmitted over a communication channel. At the time of printing, the images are decompressed and reconstructed to a grayscale image data using Sigma filtering to preserve edges. Preferably, different Sigma filters may be applied based on contrast information within a local neighborhood region. Fuzzy edge detection may also be used to preserve edge features and prevent smearing.