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Question: What is a file extension and how are they used?
Answer:
The Short Version
 In DOS, Windows and a few other operating systems, one or several letters at the end of a filename.
The Long Version
Filename extensions usually follow a period (dot) and indicate the type of information stored in the file. For example, in the filename EDIT.COM, the extension is COM, which indicates that the file is a command file. (Depending on the operating system, the punctuation separating the extension from the rest of the filename may or may not be considered part of the extension itself.)
Back in the early days of DOS, the maximum size of a file name was eight characters, a dot and a three-character extension. Examples are AUTOEXEC.BAT and CONFIG.SYS. DOS only recognized three types of file extensions, .COM, .EXE and .BAT as programs that could be started and run. With the launch of Windows, the concept of “file associations” was introduced. A “data” file such as a graphic, spreadsheet or word processing document could be “linked” to the application program that is used to create, view and/or modify the data file. In Windows 3.x, these “links” were saved in .ini files stored in your C:\WINDOWS folder. In Windows 9x, ME, 2000 and XP, these links are stored in the Windows registry.
If you click on your my Computer icon and select View – Folder Options – File Types you will see a window that reports all of your registered file type
As you scroll through this window, you will see the name of the file type, the three or four character file extension and the name of the application program that is associated with this file type.
When you load new applications software onto your computer such as Quicken, PhotoShop or TurboTax, the application installation program will often automatically add new file types and associations to your registry. Some applications programs are notorious for wanting to override your existing file associations such as Microsoft Internet Explorer and Netscape Navigator that will ask you if you want this program registered as your default browser.
Any time that you double-click on a registered file type from within My Computer or Windows Explorer, the operating system will automatically load and run the associated applications program, then load and display the selected data file. If you double-click on a file type that is not currently associated with an applications program, you may get a window that looks like this:
If you know what application program(s) you have on your computer that can read the file type, you can scroll through the list, select the program you want to use and click on OK. If you leave the “Always use this program to open this file” box checked, this association will be stored in your registry and you won’t be asked again.
If you don’t know which applications program to choose, below are several web sites on the Internet that list most file extensions and their associated applications programs:
http://dotwhat.net 
http://www.fileinfo.net/help/windows-show-extensions.html
http://www.fileinfo.net/help/windows-change-program.html
http://www.filext.com
http://webopedia.internet.com/quick_ref/fileextensions.html
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