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The existing standard video coding schemes support spatial scalability because of its prospective applications. Unfortunately, spatial scalable codecs produce high bit rate overhead as compared to a single layer coder. In this paper, we propose a spatio-temporal scalable video coding system based on motion compensated (MC) three-dimensional subband/discrete cosine transform (3-D SBC/DCT). This coder is proposed as a solution to improve the compression performance of spatial scalability and at the same time to reduce the high bit rate consumption of the base layer. In this system, the temporal subbands are generated by a novel approach called MC DCT temporal filtering (MCDCT-TF). The temporal subbands are further spatially decomposed using two-dimensional (2-D) DCT decimation technique . The generated spatio-temporal subbands are then quantized, entropy encoded, and transmitted along with the motion vectors. Several experiments are carried out on various image sequences to test the performance of the proposed coding scheme. The simulation results show that its performance exceeds that of H263+ single layer, spatial and spatio-temporal scalable coders.