Apple TV CANNOT play DVD-quality video, let alone HD.

Ok, somebody needs to teach me a lesson (literally). This video encoding stuff is giving me headaches...
If I rip a DVD using MPEG-4 and H.264 at 100% quality the resulting file is over 8000kbps, which is higher than the 5000kbps Apple TV supports.
So, resolution-wise Apple TV may display DVD and HD signals, but when it comes to quality, it's not even close to what it should be. Is that an accurate statement?
According to the wikipedia, DVDs are encoded with MPEG-2 at 8000-14000kpbs. Now, it also says that MPEG-4 H.264 allows you to have similar image quality at much lower bit rates and much lower file size.
So the question would be, can a 5000kbps MPEG-4 be comparable to a 10000kbps MPEG-2 from a DVD?
....Or do I get all this completely wrong?
Thanks for any insight,
Julian
Dual 2.7 GHz PowerPC G5   Mac OS X (10.4.8)   2.5 Gb RAM

I'm pretty critical about my video quality and I've done a fair amount of testing using Apple's H.264 codec (using QuickTime Pro and Final Cut Studio). So, here's my take on H.264 -- it's NOT as good as many would have you believe. It's better than MPEG2, but I'd question any claim that it is four times as "good." I'd say that under the best of circumstances it's more like twice as "good" or twice as efficient as MPEG2. In any case, a 2X improvement over current state-of-the-art MPEG2 is still a pretty remarkable achievement.
So, where does that leave us with the AppleTV? First, you're not going to get consistent, solid HD quality at only 5Mbps (the limit on AppleTV). However, if you have good material and you encode with care you can definitely produce content that will exceed the quality that you might see on a standard definition DVD (or for that matter, probably as good as any anamorphic DVD).
Then there is the issue of frame rate, since the AppleTV will only do 24fps at 720p (spec) you're probably going to experience frame rate conversion artifacts on some material. Finally, the AppleTV lacks a "true" 1080i mode since for 1080i it just scales the picture up by two times from an internal video source at 960 x 540.
In any case, I'd say that given the proper source material (and the "proper" encoding) that the AppleTV potential sits somewhere between DVD quality and true HD. Of course, the video material that Apple currently sells on the iTunes store is encoded at approximately 1.5Mbps and at frame sizes equal to or smaller than 640 x 480. Given those (low) numbers, you should not expect anything that even approaches DVD quality (assuming that you compare against a good DVD). However, I don't believe that Apple has ever claimed "DVD quality" with the current iTunes content. Under the best of conditions -- and the quality varies widely -- the current iTunes content is most similar to a decent standard definition broadcast, but with a slightly different "look" and a different set of defects than you would see in an analog broadcast.
In the interest of a full disclosure, you should know that I already own an AppleTV and I think it's a pretty good product (i.e. it's worth the $300 even though it may never really achieve HD quality). But let's be fair, if it offered solid HD playback, 30fps 720p, and true 1080i it would be a near "steal" at only $300 (given its audio and still photo capabilities, its wireless 802.11n features, the internal HD storage, and its beautiful "10-foot" GUI).

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