Due to the need to interchange video data in a seamless and cost effective manner, interoperability between applications, terminals and services has become increasingly important. The ISO Moving Picture Experts Group (MPEG) has developed the MPEG-1 and the MPEG-2 audio-visual coding standards to meet these challenges; these standards allow a range of applications at bitrates from 1 Mbits to 100 Mbit/s. However, in the meantime, a new breed of applications has arisen which demand higher compression, more interactivity and increased error resilience. These applications are expected to be addressed by the next phase standard, called MPEG-4, which is currently in progress. We discuss the various functionalities expected to be offered by the MPEG-4 standard along with the development plan and the framework used for evaluation of video coding proposals in the recent first evaluation tests. Having clarified the requirements, functionalities and the development process of MPEG-4, we propose a generalized approach for video coding referred to as adaptive scalable interframe coding (ASIC) for MPEG-4. Using this generalized approach we develop a video coding scheme suitable for MPEG-4 based multimedia applications in bitrate range of 320 kbit/s to 1024 kbit/s. The proposed scheme is referred to as source and bandwidth adaptive scalable interframe coding (SBASIC) and builds not only on the proven framework of motion compensated DCT coding and scalability but also introduces several new concepts. The SNR and MPEG-4 subjective evaluation results are presented to show the good performance achieved by SBASIC. Next, extension of SBASIC by motion compensated 3D- DCT coding is discussed. It is envisaged that this extension when complete will further improve the coding efficiency of SBASIC.