The HTML file with the "#include" in it needs the .shtml extension. The included file can have, as far as I know, any extension that you'd like.
Do you have the line:
in your .htaccess file for that folder?
The comment marks perform two functions:
1. They identify the line as an 'include' directive. You can think of the "<!--" as part of the "#include".
2. They prevent the actual text of the line from being shown by the browser if the file doesn't get included for some reason.
<added>
If I'm recalling things correctly, you can use the .html extension for your pages with includes if you add the line:
Code:
AddHandler server-parsed .html
to your .htaccess file for that folder.
</added>