In this paper, we present an image compression algorithm that is capable of significantly reducing the vast mount of information contained in multispectral images. The developed algorithm exploits the spectral and spatial correlations found in multispectral images. The scheme encodes the difference between images after contrast/brightness equalization to remove the spectral redundancy, and utilizes a two-dimensional wavelet trans-form to remove the spatial redundancy. The transformed images are than encoded by hilbert-curve scanning and run-length-encoding, followed by huffman coding. We also present the performance of the proposed algorithm with KITSAT-1 image as well as the LANDSAT MultiSpectral Scanner data. The loss of information is evaluated by peak signal to noise ratio (PSNR) and classification capability.