A very low bit rate video coding decoding algorithm (codec) that can be used in real-time applications such as videotelephony is proposed. There are established video coding standards (MPEG-1, MPEG-2, H.261, H.263) and standards under development (MPEG-4 and MPEG-7). The proposed cod ing method is based on temporal prediction, followed by spatial prediction and finally entropy coding. The operations are performed in a color-palletized space. A new method based on parameterizing texture features is used for de termining the difference image, which shows the temporal prediction errors. A new hierarchical 2D spatial prediction scheme is proposed for lossy or lossless predictive coding of arbitrary shaped regions. A simulation of the codec is implemented in object oriented C++ language using template based program ming techniques. The codec is tested using official MPEG-4 test sequences. Its performance is compared to H.263 coding at the same bit rate and although numerically inferior, visually similar results are obtained.