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A modified 3-bit per sample differential PCM coder that is subjectively comparable to a 10-level differential PCM coder is described. The accuracy of coding the signals preceding and following large signal changes is restricted. The bits thus saved are used to improve the coding accuracy of large signal changes. No visible impairments are introduced by this process. The changes in coding strategy are carried in the main signal stream to the receiver and do not require flags or buffer memory. The coder's algorithm, implementation, and subjective results are described.