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In this paper, an improved adaptive update and adaptive prediction algorithm is put forward. The method makes full use of the correlation of neighboring pixels, which the approximation band and the detail bands obtained by a polyphase decomposition of an original image perform the proposed adaptive update step one by one, then the detail bands perform the adaptive prediction algorithm. The advantage of this method is its discrimination ability to use gradient operator for deciding the smooth areas and the discontinued areas, and choosing the different prediction filter according to the local characteristics. Simulation results show that the proposed lifting scheme algorithm generates lower entropy of high-frequency coefficients, lower energy of high-frequency coefficients and more zero values in wavelet transform domain, which makes it useful for digital image compression.