Discrete cosine transform (DCT) coding has been emerging as a key element for image data compression. Conventional DCT coding algorithms, which treat all the image areas indiscriminately, unfortunately give nonuniform image quality for various image contents. This motivates work on DCT schemes adaptive to the image contents so that a better tradeoff between bit rate and image quality can be achieved. In this paper, a DCT algorithm with adaptive thresholding and quantization is combined with variable block size segmentation to further improve the coding performance. A new segmentation criterion is proposed. Some simulation results are given to illustrate the superiority of this adaptive DCT algorithm with segmented blocks. It is also shown that this algorithm poses itself as a promising compression method to deal with the composite images consisting of text/graphics and natural scenes.