The effect of image stabilization on the performance of the MPEG-2 video coding algorithm is investigated. It is shown that image stabilization prior to MPEG-2 coding oi an unsteady image sequence does increase the quality of the compressed video considerably. The quality improvement; is explained by fact that an actual zero motion vector is favored over a zero differential motion vector in the MPEG-2 video coding scheme. The bits saved in coding the motion information in P Frames are then utilized in the coding of the DCT data in I frames. The temporal prediction of the macroblocks in P and B Frames are also improved because of the increased quality of the compressed I Frames and because an image stabilization algorithm can compensate for displacement with better than 1/2 pixel accuracy.