Abstract: A method for transcoding an MPEG-2 video stream to a new bitrate using the motion vectors from the original stream. A desired bitrate is chosen and the macroblocks of the target frames are requantized accordingly in the transcoder. In order to adjust the motion compensation in the target frames, the difference between the original and target reference frames is added on a pixel-by-pixel basis to the target frame's prediction error, or correction matrix. An ideal quantization value is determined using a perceptive algorithm that reduces image quality in high-activity areas where the human visual system does not perceive quality reduction and enhances image quality in areas where noise is noticeable. The new correction matrix is transformed to a frequency domain by a DCT. A coefficient threshold algorithm then identifies those coefficients that would be set to zero using the ideal quantization value and sets them to zero.