I've always wanted to know how exactly the overdrive works on our cars.

I understand the concept of the engine turning slower than the output shaft of the transmission, but how does this happen?

When you shift into overdrive on an M46, you are engaging a "5th" gear with a ratio of (IIRC) 0.79:1. So, if I am interpreting this correctly, that means that in overdrive the rear wheels turn one revolution for every 0.79 revolutions of the engine. When I shift into overdrive at 55mph, the tach drops from 2500rpm to ~2000rpm. The engine is turning considerably slower but I am able to maintain speed AND I get better mileage. Makes perfect sense UNTIL you consider that the engine is making LESS torque at 2000rpm. In fact, a stock B230F doesn't even come close to developing peak torque until about 2700rpm. So in theory it is working HARDER to do the same amount of work with less power in top gear, BUT we all know that this is more efficient than the 1:1 "direct drive" ratio of 4th. Ergo, I average 29+mpg on a long trip at 70-75mph with the overdrive on. But turn the overdrive off and efficiency drops to 23-24mpg. That's easy to explain-the engine is turning faster (about 3200rpm vs. 2500-2600rpm @ 70mph) and thus uses more fuel. What I don't comprehend is... how can the engine turn slower (way out of its "power curve"), maintain speed without lugging down AND use less petrol?

I'm sure this is a dummy question for the gurus. But the Irish have a tendency to drink away their brain cells...;-)