Abstract: A method and a system are presented for generating differentially compressed output from binary sources. Given two versions of the same file as input streams, a compact encoding of one of the input streams is generated, by representing it as a set of changes with respect to the other input stream. Algorithms for differencing files requiring time linear in the size of the input and a constant amount of space for execution are presented. In addition, advanced techniques for improving existing differencing algorithms are developed and applied to previous methods. These techniques allow algorithms to increase their efficiency without a loss of compression and to accept arbitrarily large inputs without sacrificing correctness or degrading the compression data rate. The differential compression methods provide a computationally efficient compression technique for applications that generate versioned data.