A new coding strategy is described which is an extension of the pre-processing technique, called the Classified Adaptive Block/Run-Length Coding (CABC) scheme. Using the 7th order Markov model predictor, the present picture element (pel) is predicted from seven previous pels, the prediction errors being coded for subsequent transmission. Each scan-line, containing the prediction errors, is categorized into two states, where each state is divided adaptively into smaller blocks of size M and M is found using, as a criterion, the probability of correct prediction. The choice for M is shown to be nearly optimum. The performance of this scheme has been evaluated by computer simulation for five CCITT SG. XIV test documents.