In this paper, we propose a novel rate-distortion (R-D) optimized disparity based coding scheme for stereo images. This new scheme efficiently integrates the coding of the disparity field with the residual image obtained via disparity estimation/compensation (DE/DC) in an R-D framework. The scheme first performs a quadtree decomposition of the target image and computes the disparity information along with the residual image for each node in the tree. An R-D based algorithm is then used for optimum bit allocation among the different quadtree nodes. The proposed scheme further jointly encodes the neighboring nodes with similar disparity information to attain higher coding gains. We present simulation results for the proposed scheme and compare these results with the performance of a fixed block size DE/DC based JPEG2000 stereo image coder. Our simulations show that the proposed scheme outperforms the fixed block size based disparity compensated JPEG2000 coder by more than 0.5 dB.