To provide higher embedding capacity without sacrificing the imperceptibility, a novel steganographic technique based on nine-pixel differencing with modified Least Significant Bit (LSB) substitution is proposed. The image is divided into 3×3 non-overlapping blocks. In each block the average difference value is calculated. Based on this value the block is classified to fall into one of the four levels such as, lower, lower-middle, higher-middle, and higher. If a block belongs to lower level then 2-bit LSB substitution is used in it. Similarly, for lower-middle, higher-middle, and higher level blocks 3, 4, and 5 bit LSB substitution is used. After LSB substitution the pixel values are readjusted to minimize distortion such that these modified values do not disturb the embedded bits. The experimental results reveal that the stego-images are imperceptible and hiding capacity is higher. Keywords: Modified LSB Substitution, Nine-Pixel Differencing, Pixel Value Differencing, Steganography