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In this paper, we analyze statistical and rate-distortion (R-D) properties of MPEG-4 fine-granular scalability (FGS), which has recently become an important scalable compression framework and a de-facto standard for Internet video streaming. We first propose a novel statistical model of DCT residue that accurately captures the properties of the input to the MPEG-4 FGS enhancement layer. Our results show that FGS residue concentrates a lot of probability mass near zero and cannot be accurately modeled by Gaussian or Laplacian distributions. We then model the distortion of each bitplane based on the proposed statistical framework and further demonstrate that our R-D model significantly outperforms current distortion models.