the variable which you have in one action cant be used in

some other action .so by using environment variables we can

use the variables in one action in to another action.

environment variables are 3 types,

(1). user defined internal

(2). user defined external

(3). builtin

Sreeprasad is little right but not completely in my way...

he is right up to his answer..

he didnt say main use..

Environment variables are mainly used to know information of
run after completion of execution...and to pass the
variables from system configuration..

for examples...

If we are doing parameterization and after completion of
execution we want to know how many iterations were executed
and in each iteration what are the values were taken..we can
see them with out going results window and by writing
notepad file and using built in environment variables.

for this we create a folder for each test and we create text
file for each action..we will write these information in
notepad files.

For more information about this mail me@
nanda.dreddy@gamil.com

The following are the uses of Environment variables:
1) Environment variables are used to pass the variables
across the Actions in the Test Script.
For Ex: We can have max of 255 Actions in a Test script.
With the use of normal variables we cannot pass the
variables  declared in one Action to another.
But with the help of Environment Variables we can pass the
variables across the number of Actions in a test script.
I will elaborate this with a small example:

Without Environment variables:

Action1:
option explicit
dim a,b
a=10 
b=20
msgbox a
Action2:
msgbox b

when you run the script the output of Action1 would be 10
but there will be no output of Action2 (only blank msgbox
will be displayed)
So to overcome such problems we use Environment variables.

The same Ex with environment variables:
Action1:
Option explicit 
Dim a,b
a=10
b=20
msgbox environment ("a")

Action2:
msgbox environment ("b")

Now Create the Environment variables by
File-->Settings-->Test Setting-->Environment
Select variable type as User defined then Click on the 
"+" symbol Add environment parameter Name=a Value=10
repeat to give the name and value of "b" 
Check the "Load variables and values from external file 
Click apply and OK and run the script.

2)TO overcome the problems associated with "Hard-coded"
values we use Environment variables.

Hope u find it useful
for further details contact on: sheshadrineela@yahoo.com