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In this paper, we propose a video coding scheme that combines adaptive overlapped block motion compensation (AOBMC) with wavelet-based zerotree coding techniques. AOBMC combines two different motion models: conventional block motion compensation (CBMC) and OBMC. Each model has the respective superiority in some case of motion compensation. This adaptive block-wise motion compensation between both models is used to get a smooth motion field. Smoothness properties of the motion field are employed to reduce temporal redundancies in the image sequence, offering substantial improvements in wavelet-based video coding quality over a variety of bit rates. For exploiting the spatial redundancies in the wavelet subband structure, we introduce a novel technique of zerotree quantization coding based on the human vision system. Our simulation results show that the proposed hybrid wavelet motion compensation video coding scheme provides a performance gain of 0.8-1.2 dB PSNR when compares to the standard H.263 test model TMN-5.