I used virtualDUB to extract the movie frames. This is a free program you can download. Basically you just pick a begin and endpoint and export as an image sequence. Try not to pick too much - just a few seconds of video at a time. The export will give you about 24 or 30 frames (pictures) per second.
I then go in an manually delete about 1/2 or more of the pictures since I am doing about 10 frames per second on the dmd.
Then in photoshop I have several filters that I strung together that can be batch applied to all files in a directory. to create the filter string goto window->workspace->automation and create a new action, then to run that action in batch goto file->automate->batch. The filters I run are something like these, you might have to try other things out depending on the type and quality of your video: 1) resize picture to 128x32, 2) increase contrast and brightness, 3) make into grayscale, 4) save as GIF