I recently had to teach myself how to do this. I found a webresource that helped allot but allas, I can no longer find that link.
You save the page where include is being used as an SHTML but the page with that is being included as a HTML. That was my big oversite the first time.
The way it works as I understand it-
You write up whatever page information (headers, footers, navbars etc...) as a html page. here, look at my page (this is an SHTML)
here
That navbar is just an #include from (this is an HTML)
here. If you do a view source on any of the shtml pages you will see all the code for the navbar, but all I had to put in was the include. What makes it realy cool is that if I ever want to change anything (add a new link) I can just change it once in the navbar.html file and it changes on all the pages that have the #include.
I hope that helps. I use about 4 #include commands that deal with the page formating, table formats, colors, navbar and footer of the page. Keep in mind that I am an HTML newbie, so there may be a better way to do this (like that php thing), but this works for me.