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This page has the full explanation on how MPEG works. And when I say full, I mean full. Hear is a snipet, "MPEG addresses the compression, decompression and synchronization of video and audio signals. The MPEG video algorithm can compress video signals to an average of about 1/2 to 1 bit per coded pixel. At a compressed data rate of 1.2 Mbits per second, a coded resolution of 352 x 240 at 30 Hz is often used, and the resulting video quality is comparable to VHS."
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