A new prediction technique using luminance compensation with adaptive block size for multispectral image compression is proposed. The luminance compensation based on a least-squares approach is updated block by block for efficient coding. The new technique exploits the property that the spatial features of neighboring spectral bands are almost identical. The image content of each band usually has almost the same spatial shape even when the pixel values are different. A Lagrange-multiplier technique is also used to optimize the quadtree for the adaptive block size.