There are only two states inside a computer on and off which represent zero and one?

Yes but if you multiply that by millions of on/off switches suddenly it becomes quite impressive. Just look at your computer. That's how they all work.

Assuming you have a database of 1 megabyte that would be eight million bits or individual switches that can be either on or off. The total number of states that can be potentially represented by a database that large would be calculated by 2 raised to the 7,999,000 power. That's a lot of distinct possibilities. "0" is off

"1" is on

this is binary and throught differing combo's on 0 and 1 the represent numbers and letters.