Abstract: A group packet encapsulation and (optionally) compression system and method, including an encapsulation protocol increases packet transmission performance between two gateways or host computers by reducing data-link layer framing overhead, reducing packet routing overhead in gateways, compressing packet headers in the encapsulation packet, and increasing loss-less data compression ratio beyond that otherwise achievable in typical systems. Packets queued at a node configured in accordance with the present invention are classified, grouped, and encapsulated into a single packet as a function of having another such configured node in their path. The nodes exchange encapsulation packets, even though the packets within the encapsulation packet may ultimately have different destinations. Compression within an encapsulation packet may be performed on headers, payloads, or both.