The SPIHT (set partitioning in hierarchical trees) method proposed by Said and Pearlman is a very successful image compression algorithm, and has become the core technology of MPEG-4 and JPEG-2000. In this paper, we develop a compression-domain watermarking technique based on the SPIHT coding. In contrast of the conventional approaches that incorporate watermarks into the transformed coefficients, the proposed method impresses the binary watermarking sequence directly on the bitstream generated in the quantization process. The security of the system is assured by the pseudo-random nature of the watermarking sequence and the locations it resides in. The performance of the system can be enhanced with minimal complexity by a joint optimization of quantization and watermarking. Experiments show that our method survives the standard attacks, including the JPEG lossy compression, rotation with auto-scaling, and the StirMark random geometric distortion.