We present a method and apparatus for performing adaptive data compression. An alphabet and vocabulary in the encoder and decoder is built adaptively and stored in a dictionary as symbols are to be encoded and decoded. Each time an unknown symbol is to be encoded by the encoder, the encoder adds the symbol to the dictionary and transmits it in plain in the encoded string. The code words transmitted by the encoder include symbols and indexes. The state of a prefix bit preceding the code word indicates whether the code word is a plain symbol or an index of a symbol or string of symbols stored in the dictionary. The decoder examines the prefix bit of each code word as it is received to determine if the code word stores a symbol in plain or in index. If the code word stores a symbol in plain, the decoder learns the symbol by adding a sequence of symbols resulting from the concatenation of previously decoded symbols and the first symbol of the currently decoded symbol and by adding the symbol to its dictionary. If the code word stores an index, the decoder decodes the code word by extracting the symbol or sequence of symbols stored in the dictionary at the respective index in the dictionary.