Abstract-This paper deals with adaptive solutions to the socalled set-membership filtering (SMF) problem. The SMF methodology involves designing filters by imposing a deterministic constraint on the output error sequence. A set-membership decision feedback equalizer (SM-DFE) for equalization of a communications channel is derived, and connections with the minimum mean square error (MMSE) DFE are established. Further, an adaptive solution to the general SMF problem via a novel optimal bounding ellipsoid (OBE) algorithm called BEACON is presented. This algorithm features sparse updating, wherein it uses about 5-10% of the data to update the parameter estimates without any loss in mean-squared error performance, in comparison with the conventional recursive least-squares (RLS) algorithm. It is shown that the BEACON algorithm can also be derived as a solution to a certain constrained least-squares problem. Simulation results are presented for various adaptive signal processing examples, including estimation of a real communication channel. Further, it is shown that the algorithm can accurately track fast time variations in a nonstationary environment. This improvement is a result of incorporating an explicit test to check if an update is needed at every time instant as well as an optimal datadependent assignment to the updating weights whenever an update is required.