An image processing method combining compression and watermark techniques is provided. In the method, a block is taken as a unit, and two ordered dither arrays mutually conjugate are used to code an original image, so as to insert information of a watermark into the original image during the coding process. Accordingly, the method generates a compressed image gives consideration to the compression ratio, the image quality and the data safety. On the other hand, the method also provides a procedure to extract the watermark from the compressed image, in order to verify whether the compressed image has been modified illegally.