Among the image coding techniques, vector quantization (VQ) has been considered to be an effective method for coding images at low bit rate. The side-match finite-state vector quantizer (SMVQ) exploits the correlations between neighboring blocks (vectors) to avoid large gray level transition across block boundaries. In this paper, an improved SMVQ technique named two-pass side-match finite-state vector quantization (TPSMVQ) is proposed. In TPSMVQ, the size of the state codebook in the first pass is decided by the variances of neighboring blocks. In the second pass, we improve the blocks encoded in the first pass whose variances are greater than a threshold. Moreover, not only the left and upper blocks, but also the lower and right blocks are used construct the state codebook. In our experiment results, the average improvement of the second pass was up to 1.5 dB in PSNR over the first pass. In comparison to ordinary SMVQ, the average improvement is up to 1.54 dB at nearly the same bit rate.