NotTaR of Television Sets : How does Picture-In-Picture (PIP) work? 
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How does Picture-In-Picture (PIP) work?

A separate video input or tuner provides the PIP baseband signal which is then resized and stored in a frame buffer large enough to hold the X and Y dimensions of the PIP image. Readout is timed to place the PIP image in the selected area of the screen and it is substituted for the main video. What could be simpler?!