A hyperspectral image encoder (10) for compressing hyperspectral imagery includes a differential pulse code modulation (DPCM) loop (26) to perform data decorrelation in the spectral domain and a discrete wavelet transform (DWT) processing means (28) to perform decorrelation in the spatial domain. The DPCM loop (26) determines an error image between a present image at the input of the encoder (10) and a predicted image. The DWT processing means (28) then divides the error image into a plurality of frequency subbands and quantizes information within the subbands in accordance with a plurality of predetermined quantization states to provide a coded output signal. In one embodiment, an interband predictor (24) is provided to predict an image, for use in calculating the error image, using the coded output signal.