A system and method of operation of an image processing system includes: a pre-processing module for receiving a raw image block of a source image from an imaging device; a transform module for forming a coefficient block by performing a transform operation on the raw image block, and the transform operation including a wavelet transform or a discrete cosine transform; and an encoding module wherein the encoding module is for calculating a coefficient significance vector, a partition significance vector, a run-length coded value, and a Golomb coded value for a portion of a significant partition, and forming an encoded block in an image bitstream having the run-length coded value and the Golomb coded value, and the encoded block.