What are Namecoins exactly, how do they differ from Bitcoins, and how come one is able to merge mine them along with Bitcoins?
Namecoin is a distribuited DNS system where information held about a web address (MX, A, etc) are held within the coin itself. Advantages of this are no other company holds the address, unique ownership will always be had due to the way the bitcoin works. (no man in the middle attacks, CA will no longer be needed)
Specific DNS servers are required to browse these sites. There are a handful of public servers available.
The code is being reviewed on a regular basis as it is very young and building a unique usable specification is a challenging task, even with all the features bitcoin has left in place for it.
At this time the extension is .bit although this can be changed or even removed completely if wanted.
How does merged mining work? will provide details on Merged Mining.