How do you create an mpeg video of a Warcraft III game? When I try to
save a replay from the game, it gives me a file that my friends can?t
use. Thank you.

There is an excellent application that does what you want more: FRAPS.
You can get more information on it here:

http://fraps.com/

The demo version of FRAPS records a max of 30 secs. You can record
multiple 30sec videos and use windows movie maker to put them
together. I have used this way to make a few game movies - very easy
to do.

Alternatively you could use Taksi 
http://taksi.sourceforge.net/
It's free and not limited to 30s. 

that said, you get what you pay for. (Note that both Fraps and Taksi
are for recording new videos.)

Either way, take the outputted video and process it with something like Virtualdub
http://virtualdub.sourceforge.net/
- you can get it into the size and format that you want. You can also,
if you're that way inclined, play with the sound so you can add your
own commentary or music in. It's not exactly friendly if you;ve never
used it before but it's a brilliant tool once you get used to it. You
can also use it to stitch the movies together (if you used Fraps to
capture 30s snippets).