Method and encoder for encoding a digital video image stream. The encoding includes spatial compression of still images in the video stream and temporal compression between the still images. The spatial compression is carried out by converting a time domain image of a macroblock to a frequency domain image of the macroblock, taking the discrete cosine transform of the frequency domain image, transforming the discrete cosine transformed macroblock image by a quantization factor, and run length encoding the quantized discrete cosine transformed macroblock image. The temporal compression is carried out by reconstructing the run length encoded, quantized, discrete cosine transformed image of the macroblock, searching for a best match macroblock, and constructing a motion vector between them. This forms a bitstream of run length encoded, quantized, discrete cosine transform macroblocks and of motion vectors. This bitstream is passed to and through an external buffer to a transmission medium. The number encoded bits read by a host from the external buffer is fed back to the encoder for calculation in real time of a dynamic buffer level indicator indicative of the fullness of the external buffer. The encoder may generate a BUFFER_—EMPTY flag, BUFFER_—ALMOST_—FULL flag and/or BUFFER_—FULL flag for the host.