If you're looking for inexpensive pieces of wood to try for shank extensions/accents, you can start with jumbo pen-making blanks. I've found that some of the burls have rather incredible grain, and if you get stabilized blanks (impregnated with plastic) they take a shine like no tomorrow. You can get these here:
http://www.woodturnerscatalog.com/frame ... lanks.html
http://www.penmakingsupplies.com/Projects/index.php
Among others. Someone recently posted a link to aanother place, and I can't recall the URL at the moment.
The knifemaker's supply source is a great idea. I get all my sanding belts from Jantz Supply:
http://www.jantzsupply.com
They have all manner of handle material that's also appropriate for shank material as well.
As far as attaching, I usually drill a very shallow mortis, say 1/8" or so, with a forstner bit (to reduce any potential airspace), and then turn a tenon on the shank extension to fit in. I'm not overly worried about a perfect fit , as long as it's not too loose it's okay. Then glob on some 5-minute epoxy, clamp it together for a while, and let it cure. I usually wait at least 24 hours to drill the stem mortis and shape the shank after attaching the extension. This is just because my paranoid mind says that a couple hours simply isn't enough time for the epoxy to set completely.
For wood, as Tyler said, just about any hardwood will do. Be creative, use alternative materials, and even get freaky and use something you've never seen on a pipe before. You might come with something that's incredibly attractive.
) textual explanation to supplement the video's instruction. So, that is fair game too. 
Both...glue the inlay on its own tenon.
