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Efficient bit stream adaptation and resilience to packet losses are two critical requirements in scalable video coding for transmission over packet-lossy networks. Various scalable layers have highly distinct importance, measured by their contribution to the overall video quality. This distinction is especially more significant in the scalable H.264/advanced video coding (AVC) video, due to the employed prediction hierarchy and the drift propagation when quality refinements are missing. Therefore, efficient bit stream adaptation and unequal protection of these layers are of special interest in the scalable H.264/AVC video. This paper proposes an algorithm to accurately estimate the overall distortion of decoder reconstructed frames due to enhancement layer truncation, drift/error propagation, and error concealment in the scalable H.264/AVC video. The method recursively computes the total decoder expected distortion at the picture-level for each layer in the prediction hierarchy. This ensures low computational cost since it bypasses highly complex pixel-level motion compensation operations. Simulation results show an accurate distortion estimation at various channel loss rates. The estimate is further integrated into a cross-layer optimization framework for optimized bit extraction and content-aware channel rate allocation. Experimental results demonstrate that precise distortion estimation enables our proposed transmission system to achieve a significantly higher average video peak signal-to-noise ratio compared to a conventional content independent system.