The motion compensated-and diff erence-residual frames of a typical video sequence display strong energy localization in the spatial domain. SPIHT expends many bits describing the location of the areas of energy concentration, and at low rates, these hits, which do not contribute to a PSNR increase. are wasteful. The scheme to be descrihed avoids this wastage by performing local rate-distortion estimation, and spatial bit assignment to achieve global PSNR optimality. The key to the algorithm is an extremely fast and accurate R-D estimation scheme, which permits this algorithm to operate in real-time.