In this paper, we investigate a state estimation problem involving finite communication capacity constraints. Unlike classical estimation problems where the observation is a continuous process corrupted by additive noises, there is a constraint that the observations must be coded and transmitted over a digital communication channel with finite capacity. This problem is formulated mathematically, and some convergence properties are defined, Moreover, the concept of a finitely recursive coder-estimator sequence is introduced, A new upper bound for the average estimation error is derived for a large class of random variables, Convergence properties of some coder-estimator algorithms are analyzed. Various conditions connecting the communication data rate with the rate of change of the underlying dynamics are established for the existence of stable and asymptotically convergent coder-estimator schemes.