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As HTML 3.2 moved toward completion, the next stage of HTML was already on the horizon. In July 1996 an experimental DTD (Data Type Definition) for HTML appeared quietly on the W3C web site. Code-named "Cougar", it contained all the capabilities of HTML 3.2 in addition to several new key features. Many capabilities that have been under discussion and development by the W3C were included in this DTD, such as Style Sheets, Scripting, Internationalization, the Object element, and extensions to forms and tables.
This experimental version also originally contained a version number (HTML version 3.5) which was later retracted. Since it was only experimental at that stage, and subject to frequent change, the ERB did not want to give official sanction to Cougar by assigning a version number to it (presumably to avoid the possible version number scheme clash that occurred with the stillborn HTML 3.0 draft.)
The Move To HTML 4.0
In July, 1997 the W3C released the first public draft of HTML 4.0. This new version of HTML was essentially a more mature and official form of the Cougar DTD published along with extensive documentation. Along with the original new features found in Cougar come many long-needed improvements such as recognition of the syntax for frames that is in common use, and an emphasis on making the language accessible to people with disabilities. HTML 4.0 is also the first version to use Unicode as the base character set, allowing millions of characters to be displayed instead of just a few hundred.
Even though this version of HTML is being developed under the auspices of the member companies (which include the major browser makers), some existing functionality found in browsers will never be included in HTML 4.0 or any later version for that matter. The need for partial solutions to certain problems (such as EMBED, BGSOUND, SPACER and MARQUEE) is negated with the introduction of new general features like OBJECT and CSS functionality.
HTML 2.0 and 3.2 documented popular current practice, so there was little need to adapt the capabilities of popular browsers to support them. It has taken browsers many years since HTML 4.0 was released for browsers to come close to fully implementing all the many nuances and features of the specification.
In the meantime, the W3C has polished the HTML 4.0 specification and released a minor update, HTML 4.01, which contains many editorial changes along with some minor tweaking to the DTDs.
Why it is important
HTML 3.2 codified and made official many of the extensions created by browser vendors at the time, but was still behind in terms of what was possible in the current browsers of the day. HTML 4.0 extends the language in officially sanctioned directions and allows for powerful capabilities never before possible (including some ideas never implemented from the HTML 3.0 draft.)
The HTML 4.0 version would appear to be the last version of "HTML" (as we know it) that will be released. Future versions of the language are now based on XML rather than SGML. In fact, development of an XML replacement for HTML was in parallel development with HTML 4.0 for some time; it is known as XHTML 1.0 and is a direct mapping of HTML 4.0 to the XML universe.
There will always be HTML documents on the web, and HTML 4.0 goes the farthest of any official specification towards codifying many of the browser-extensions that have made the web what it is today (for better or worse.) Browsers will continue to change over time, but it is a good bet that they will all be supporting HTML 4.0 in one form or another for quite some time.