A system and a method for wavelet-based low bitrate video coding is provided. The system and method of this invention processes each frame of a video sequence based on its content. The discrete wavelet transform of each frame is taken separately. If the difference between the contents of a first frame and a second frame is above a threshold, then the wavelet transformed second frame is quantized and lossless encoded. If the difference is less than a threshold, then motion estimation is employed in wavelet domain. Then the difference between the wavelet transformed second frame and the motion compensated wavelet transformed second frame is quantized and lossless encoded. The quantization is applied by using dynamic adjustment. The quantization tables are optimized based on the coded frame characteristics. In addition to the coded frames, the lossless coded motion vectors are also transmitted to the decoder unit. To improve the quality of the coded video sequence another decision criteria is used at the feedback loop of this invention. The coded second frame is decoded and compared with the original second frame. If the difference between the two frames is above a threshold, then the wavelet transformed second frame is quantized and lossless encoded instead of the motion compensated second frame.