Abstract: In this paper, a new hybrid wavelet video coding algorithm combined with H.263 and SLCCA for very low bit rate application is proposed. In the proposed algorithm, first, fine tuned motion estimation of H.263 is used to reduce temporal redundancy, and exhaustive overlapped block motion compensation is used to ensure the coherency in motion compensation error frames. Second, wavelet transform is applied in the motion compensation error frames to achieve global energy compaction. Third, the wavelet coefficients are organized and represented by SLCCA. Last, the horizontal and vertical components of motion vectors are encoded by adaptive arithmetic coding. The proposed algorithm is tested on both Class A sequences Akiyo and Class B sequences Foreman （QCIF） and satisfactory performance is obtained.