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A perceptually scalable audio coder generates a bit-stream that contains layers of audio fidelity and is encoded in such a way that adding one of these layers enhances the reconstructed audio by an amount that is just noticeable by the listener. Such algorithms have applications like music on demand at variable levels of fidelity, for instance using 3G and 4G cellular radio systems operating at different bit rates. While the MPEG-4 natural audio coder can create finely scalable bit streams using bit sliced arithmetic coding (BSAC), its perceptual quality at low bit rates is poor. On the other hand, the nonscalable transform-domain weighted interleaved vector quantization (TWIN-VQ) performs well at low bit rates. In this paper, we present a modified version of TWIN-VQ algorithm that generates a perceptually scalable bit-stream with many fine layers of audio fidelity. Using TWIN-VQ as our base ensures the best possible perceptual quality at low bit rates. Specifically, the proposed scalable algorithm performs as well as TWIN-VQ at rates of 8 to 16 kb/s and outperforms scalable BSAC by between 64% and 172% at rates of less than 24 kb/s.