The main limitations on any communication system are “channel bandwidth” and “noise”. This paper deals with the data rate which is related to channel bandwidth. The real time images from any source will occupy large amount of space on a storage device. Hence it consumes maximum bandwidth for transmitting it and there are so many methods to reduce the image size and hence the bandwidth of the signal. This paper shows wavelet based compression methods. Discrete Wavelet Transform is a powerful tool for analyzing the signals. With the help of a thresholding function, it will be more useful in compression, but this method has some disadvantages like selectivity and shift invariance. So a much better method is proposed. In the proposed method a completely new set of wavelets were designed with lifting filters. Arithmetic coding is combined with proposed algorithm for reducing the size of images with less mean square error (MSE) at high compression ratio (CR).