This paper considers the problem of distributed scalable coding of correlated sources that are communicated to a central unit. The general setting is typically encountered in sensor networks. The conditions of communication channels between the sensor sources and fusion center may be time-varying and it is often desirable to guarantee a base layer of coarse information during channel fades. Specifically, we consider a multi-stage coding system to perform such distributed scalable coding of correlated sources. This problem poses new challenges. We show that mere extensions of distributed coding ideas to include multi-stage coding yield poor rate-distortion performance, due to underlying conflicts between the objectives of scalable and distributed coding. An appropriate system paradigm is developed which allows such tradeoffs to be explicitly controlled within joint optimization of all the system components. We propose an iterative joint design technique and derive the necessary conditi...