As communication channels are increasing in number, reliability of faithful communication is reducing. Hacking and tempering of data are two major issues for which security should be provided by channel. This raises the importance of steganography. In this paper, a novel method to encode the message information inside a carrier image has been described. It uses Karhunen-Loève Transform for compression of data and Least Bit Substitution for data encryption. Compression removes redundancy and thus also provides encoding to a level. It is taken further by means of Least Bit Substitution. The algorithm used for this purpose uses pixel matrix which serves as a best tool to work on. Three different sets of images were used with three different numbers of bits to be substituted by message information. The experimental results show that algorithm is time efficient and provides high data capacity. Further, it can decrypt the original data effectively. Parameters such as carrier error and message error were calculated for each set and were compared for performance analysis.