This paper presents a novel technique for image restoration based on nonlinear interpolative vector quantization (NLIVQ). The algorithm performs nonlinear restoration of diffraction-limited images concurrently with quantization. It is trained on image pairs consisting of an original image and its diffraction-limited counterpart. The discrete cosine transform is used in the codebook design process to control complexity. Simulation results are presented that demonstrate improvements in visual quality and peak signal-to-noise ratio of the restored images.