We had a similar problem with the message "An extension failed to
initialize: Can't open EXTEND.DAT." in Outlook 2003. All of the
rights were correct and the user had complete access to those files.
We also tried the other suggestions listed here and at other forums,
including registry fixes.
Upon investigation, we noticed that the default icon for the
Extend.Dat file was a CD. It occurred to us that the staff onsite at
that location had recently loaded a PC tutor program. That program
created a default file association with the .DAT extension.
Seeing this, the problem became clear: Outlook was using the default
launch command for the program associated with the extension. In
other words, Outlook called EXTEND.DAT and tried to PLAY a CD instead
of OPENing a .DAT file.