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ad a hope perhaps the lads over at the Xentax forums had been wrong, and that the PMCQ algorithim was just a fork of LZO.
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No

This is a different algorithm.
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Is this just as simple as being an error on xtool's part?
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Yep. False positive detect.
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Honestly might try again to adapt his original decompression function
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You also need a compress function.