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(a) How do you create an excerpt from a DVD? Are there free tools to do this, or will it require commercial software? The DVD contains files with extensions .BUP, .IFO, and .VOB, if that is relevant.
(b) How best to embed the excerpts in a webpage? From recent comments here, it seems Flash is the best way to go?
Edit the mpg for the clips you want.
Use Adobe's encoder or Flash itself to encode the mpgs to .flv.
Create your Flash player, or link to them with a free Flash player.
Add the Flash to pages.
Upload, latte (or beer.)
You may also want to look into using a MPEG editor for editing before encoding. MPEG can be somewhat troublesome to edit especially with the wrong tools. One free tool is called cuttermaran but this only does simple cuts, other good tools for editing MPG include Womble any Ulead editor and the TMPGenc line of products.
I'd also research deinterlacing if you really want to make it look good. If you have ever seen video clips that have those horizontal lines, especially during fast motion that is because they didn't deinterlace the video. thsi should really be done to any video you intend to distribute via the web intended for playback in embedded content.