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An alternative method to H.263 for encoding of moving images at bit rates below 64 kbit/s is presented using adaptive spatial subsampling, mesh based interpolation and node tracking. This is why we call this new coding algorithm Mesh Based Interpolative Coding. Data compression is achieved by representing the image content by a number of non- equidistant sampling points (nodes) for luminance and color difference signals. The decoder reconstructs the image by interpolating the transmitted sampling points. For a given number of nodes which corresponds approximately to the total bit rate, the coder generates the node positions by minimizing the mean square error between the original picture and the interpolated picture. For moving images, each node is associated with a motion vector for node tracking. Simulation results of a complete encoder and decoder show that this method can provide lower bit rates than conventional schemes at a given picture quality for sequences with moderate movement.