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Traditional MPEG-2 video compression uses test model 5 (TM5) as the rate-control algorithm, which does not consider the perceptual quality of the compressed sequence. This paper proposes a new rate-control algorithm, which integrates TM5 with the Watson's digital-video-quality (DVQ) metric. As a proponent of the VQEG (Video Quality Expert Group), the Watson's DVQ is a subjective quality metric based on the human visual system (HVS) which estimates the perceptual quality of human viewers. Simulation results indicate that the proposed algorithm outperforms TM5 for low-motion video sequence, and performs about the same as TM5 for high-motion video sequences.