An improved LZW algorithm creates images at the time of compression, and obtains codes from those images at the time of decompression. At the time of compression, string (x) is obtained from the input stream and code (x) is retrieved from the LZW table for string (x). Assuming that a valid image (x) exists for the code, the system and method of the present disclosure may either: 1) write code (x) to the output stream, or 2) write image (x) to the output stream. The enhanced decompression algorithm of the present disclosure in one embodiment retrieves the code or image and restores the original stream. In addition, 1 bit is removed from code (x+1), and its information is indirectly stored in code (x)/image (x). Thereafter, when the decompression program encounters image (x) in the compressed stream, the decompression algorithm adds binary bit ‘1’ (or ‘0’) to the code (x+1), and adds binary bit ‘0’ (or ‘1’) to code (x+1) when it encounters code (x).