A RAR file (pronounced Rare or rar) is a format used by a popular archiving application named "WinRAR". RAR files contain data that has been compressed (compacted) to reduce file size (just like a .zip file), and is a popular format for transferring large files across the internet.
To extract the compressed data (also known as unpacking), you will need an application that can read the .rar format. The most obvious choice is WinRAR itself, however there are other programs out there that can handle this file format, such as 7-Zip.
The unpacking process is fairly simple, you open the archive using your archive application, and specify the destination folder for the uncompressed files.
To compress files (using WinRAR), you highlight the file(s) that require compacting, right click and select "Add to archive".
WinRAR is a shareware application, and can open different archive formats (like .zip, .lzh etc). WinRAR can create archives in both .rar and .zip formats at different levels on compression.
For more information, please visit the WinRAR website.