If a file extension is not associated with an application you will get the "Open with" dialog. This is because Windows does not know what to open it with!
Most extensions are automatically assigned. i.e .txt is associated with Notepad, .bmp is associated with MS Paint, etc.
From the Windows Help FIle:
To associate a file extension with a file type
Open Folder Options in Control Panel.
Click the File Types tab.
Click New.
Type a new or existing file name extension, and then click Advanced.
In File type, click New to create a new file type that is associated with the file name extension. Or, click one of the existing file types.
Notes
To open a Control Panel item, click Start, point to Settings, click Control Panel, and then double-click the appropriate icon. Or, in Windows Explorer, click Tools, and then click Folder Options.
For information about how to make modifications to the file type, see Related Topics.
To change the program that opens a file, on the File Types tab, click Change.
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