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A 1.28‐inch 6‐bit color low‐power reflective LCD prototype has been developed by using low refresh rate system and memory‐type pixel (MTP) structure. As there is an intrinsic problem for the MTP structure that large flat areas, and loss of detail become noticeable when original 8‐bit RGB color is converted to 2‐bit RGB color. An adaptive compression algorithm of grey scale has been developed to minimize the image deterioration, which enables to select an appropriate parameter according to the types of images and the position on the screen. By a specific function of RGB point‐to‐point gray‐scale transformation, the picture shows better effect than the traditional processing method. The simulation and experimental results verify the effectiveness of the adaptive compression algorithm. [ABSTRACT FROM AUTHOR]