The extension dir specifies exactly the directory (just that directory) where the extensions are.
The include_path is a list of directories that PHP searches for PHP scripts you want to include (like . for the current dir or e.g. c:\php\pear which contains the PEAR library). You can add more directories like a global include directory outside DOCUMENT_ROOT. It is recommended to put e.g. configuration data in scripts outside DOCUMENT_ROOT so they can't be read accidently (generally: any data/scripts that do not have something to do with output directly).
If you use just
include "somescript.php";
then PHP will search all those directories for a script named somescript.php
Thomas