A novel audio coding algorithm is proposed where the warped-linear prediction (WLP) technique is employed to construct a perceptual pre- and post-filter for subband audio coding. A modified signal-to-mask ratio (SMR) calculation is given for subband coding of the WLP residuals of audio signals. The concept of perceptual entropy (PE) is extended to subband coding, resulting in the subband perceptual entropy (SPE), which gives a short time estimate of the lowest possible bit rate for transparent subband audio coding. Two WLP models with frequency responses approximating the spectral shape of the masking threshold are investigated and it is found that the residual signals of both models contain less SPE compared with that of the original audio signals. Subjective tests show that the proposed audio codec operating at 56 kbps has a perceptual quality comparable to MPEG-1 audio Layer II operating at 64 kbps.