To improve the hidden capacity and the security of encrypted images o f XU′s algorithm,a reversible data hiding algorithm based on prediction error and classification scrambling is proposed.Firstly,the prediction error of the non-sampled pixels is obtained by the prediction method of XU.Sec ondly,according to the range of prediction error,all non-sampling pixels are divided into two categories:vari able pixels and invariant ones.The sampled pixels,the variable pixels,and the invariant pixels are respectively s crambled and then encrypted with stream cipher to generate the encrypted image.The bit-XOR with pixel-scrambli ng combination improves the security of the encrypted image.The two least significant bits of the variable p ixels are used to store image information,and the six most significant bits of it are used to hide information .The embedding capacity is greatly improved since more than one bit are embedded in one pixel.Experimental results show that the encryption method of the proposed algorithm can effectively resist cipher-only attack (COA),and the hidden capacity of the smoothed images can exceed two bits per pixel.In general,the proposed algorithm has highe r security and embedding capacity.