This paper describes a new audio coding scheme based on adaptive wavelet analysis that provides transparent audio coding for CD-audio signals at low bit rates (≈1.4 bits/sample per channel). A new perceptual cost function is defined to obtain the best wavelet-packet base for each audio frame. The sharp variations in quantization noise that appear at the border of the frames are minimized by a novel approach that avoids overlapping. The proposed coder guarantees high perceptual quality using filters that generate wavelets of any compact support, because a bit-allocation algorithm that takes into account the equivalent filter frequency responses of the synthesis filter bank branches is used.