A video coding system and method utilizes a 3-D wavelet transform that is memory efficient and reduces boundary effect across frame boundaries. The transform employs a lifting-based scheme and buffers wavelet coefficients at intermediate lifting steps towards the end of one GOP (group of pictures) until intermediate coefficients from the beginning of the next GOP are available. The wavelet transform scheme does not physically break the video sequence into GOPs, but processes the sequence without intermission. In this manner, the system simulates an infinite wavelet transformation across frame boundaries and the boundary effect is significantly reduced or essentially eliminated. Moreover, the buffering is very small and the scheme can be used to implement other decomposition structures. The wavelet transform scheme provides superb video playback quality with little or no boundary effects.