We study image segmentation on the basis of locally excitatory, globally inhibitory oscillator networks (LEGION), whereby the phases of oscillators encode the binding of pixels. We introduce a lateral potential for each oscillator so that only oscillators with strong connections from their neighborhood can develop high potentials. Based on the concept of the lateral potential, a solution to remove noisy regions in an image is proposed for LEGION, so that it suppresses the oscillators corresponding to noisy regions but without affecting those corresponding to major regions. We show that the resulting oscillator network separates an image into several major regions, plus a background consisting of all noisy regions, and we illustrate network properties by computer simulation. The network exhibits a natural capacity in segmenting images. The oscillatory dynamics leads to a computer algorithm, which is applied successfully to segmenting real gray-level images. A number of issues regarding biological plausibility and perceptual organization are discussed. We argue that LEGION provides a novel and effective framework for image segmentation and figure-ground segregation.