Behind most audio and video files are any of a number of codecs-pieces of software that allow computers to turn huge uncompressed files into more portable, convenient formats, as well as interpret those formats and decompress the media when it needs to be played. Dozens of formats and variants exist, many of them used only by certain publishers or only for certain purposes. It isn't always easy to decide which codec is best for your purposes, and .it isn't always possible to ensure a file will play on a portable device or someone else's computer.

Codecs are generally categorized as lossy or loss less: those which trade file size for quality and those which retain all the quality of the original source. It'is the goal of every codec to strike a balance between size and quality, so users should choose which approach they prefer based on their individual needs.

You can't always tell what codec a file uses just by checking its extension. AVI and MPG are really only the extensions of container files, which hold video encoded with a certain codec along with other information such as subtitles, tag metadata (such as the title, language, director, year of release, etc) and even DRM security. Here's a quick rundown of some of the terms you'll run across, and what each really means:
MP3: The most common audio format today, MP3 is widely supported and contains no copy protection mechanism. Quality and size can be controlled by varying the bit rate, but it is still lossy and unsuitable for audiophiles. Licensing and security issues have led to the emergence of WMV (Windows Media Video), a similarly capable format.

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PEG: The Moving Picture Experts Group, part of the International Organization for Standardization (ISO) is behind many of the most common audio and video codecs. MPEG-l is found on Video CDs and offers slightly better quality than VHS. MPEG-2 is found on DVDs (using VOB container files), digital TV transmission systems and computer files a multitude of extensions. MPEG-4 is used on Blu-Ray and HD-DVD discs as well as newer digital TV signals.

P4/ J14A. MP4 is a format designed around one of the MPEG-4 standards, while M4A is the extension sometimes used for such files which contain only audio. MP4 files can contain subtitles as well as multiple audio and video streams. The term "MP4" is also thrown around to identify portable devices which can also handle video (to connote functionality greater than just MP3 playback), although this usage doesn't guarantee any format or standard compatibility.

H.264: Also known as AVC (Advanced Video Coding), this is a recent standard that allows for high quality files at lower bitrates than even MPEG-4. It's one of the standards Blu-Ray discs might use, and is also used to deliver video through Flash using FLV files. QuickTime, x264 and Nero Digital are codecs that use this standard.
VC-l: This alternative to MPEG-4, developed mainly by Microsoft, can be found on many Blu-Ray discs and is the codec behind WMV9 (Windows Media Video) files and video on the Xbox 360.