A novel scheme for coding gray-level alpha planes in object-based video is presented. Gray-level alpha planes convey the shape and the transparency information, which are required for smooth composition of video objects. The algorithm proposed is based on the segmentation of the alpha plane in three layers: binary shape layer, opaque layer, and intermediate layer. Thus, the latter two layers replace the single transparency layer of MPEG-4 Part 2. Different encoding schemes are specifically designed for each layer, utilizing cross-layer correlations to reduce the bit rate. First, the binary shape layer is processed by a novel video shape coder. In intra mode, the DSLSC binary image coder presented in [3] is used. This is extended here with an intermode utilizing temporal redundancies in shape image sequences. Then the opaque layer is compressed by a newly designed scheme which models the strong correlation with the binary shape layer by morphological erosion operations. Finally, three solutions are proposed for coding the intermediate layer. The knowledge of the two previously encoded layers is utilized in order to increase compression efficiency. Experimental results are reported demonstrating that the proposed techniques provide substantial bit rate savings coding shape and transparency when compared to the tools adopted in MPEG-4 Part 2.