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Ubiquitous use of real-time video communication on the Internet requires adaptive applications that can provide different levels of quality depending on the amount of resources available. For video coding this means that the algorithms must be designed to be scalable in terms of bandwidth, processing requirements and quality of the reconstructed signal. This paper presents a novel video compression and coding algorithm targeted at delay-sensitive applications in heterogeneous network and computing environments. The algorithm, based on the embedded zerotree wavelet algorithm for still image compression, generates a highly scalable layered bitstream that can be decoded at different qualities in terms of spatial resolution, frame rate and compression distortion. Furthermore, the algorithm is designed to require only a minimal coding delay, making it suitable for highly interactive applications like videoconferencing. The performance of the proposed algorithm is evaluated by comparison with a nonscalable codec and the penalty in compression efficiency that the scalability requirement imposes is analyzed. The codec is shown to produce a scalable bitstream ranging from about 10 kbps to 10 Mbps, while the computational complexity is kept at a level that makes software implementation on CPU-constrained equipment feasible.