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In this paper, we propose a data hiding scheme which uses our modified AMBTC compression technique for embedding the secret data. Our modified AMBTC technique converts the one bit plane into two bit plane which helps in achieving better quality compressed image as well as high capacity. In this scheme, we first apply the original AMBTC technique on the given cover image then identify the smooth and complex blocks using a user defined threshold value. In case of the smooth blocks, it converts the one bit plane into two bit plane using mean value of the block and replaces all the bits of the bit plane with the secret data bits. It calculates four quantization levels in place of two old quantization levels. In case of complex blocks, it converts the one bit plane into two bit plane but here only the first LSBs of the newly constructed bit plane is replaced by the secret data bits. The four new quantization levels …