The need for a significant reduction in bit rate for wideband digital audio signal transmission and storage has led in the last few years to the development of psychoacoustics-based data compression techniques. In this approach, the audio frequency range is subdivided into sub-bands which are approximations of human auditory critical bands. The frequency representation of audio signals is accomplished using a filter-bank implemented as a time-to-frequency transform or as a sub-band filter. Frequency-domain masking properties of the human auditory system are exploited in order to maximize perceived fidelity of a steady-state signal at a given bit rate. In a similar way, temporal masking effects are very important in the bit-rate reduction process of transient signals. In this talk, the basic principles of perceptual audio coding will be reviewed. An adaptive transform coding technique will be presented in which both frequency-domain and temporal masking properties of human hearing are exploited during bit-rate reduction. Dolby's current and future applications of this coding technology will be discussed.