The Register lead me to this Mikko Hyppönen of F-Secure tells us that Vista's default file viewing behavior still "sucks".

Older versions of Windows used to hide the extensions by default. ... It was always a bad idea, and it was used extensively by the bad guys with double extensions as a means of tricking users into running files. You know, LOVE-LETTER-FOR-YOU.TXT.VBS and so on. ... [in Vista] they still have this feature on by default.

Mikko includes screenshots to prove how bad it is.

The only thing worse than making a dumb mistake like that is not admitting it's a mistake and continuing to force it on users.