Vanilla sugar is simply regular white or powdered sugar that has been flavored or 'perfumed' by combining it with whole vanilla beans. It's a beautifully thing - the fragrance is heavenly and it imparts an additional vanilla pop. It can be purchased commercially, but is simpler to simply make from scratch.
Simply bury a couple of good vanilla beans in about a pound of sugar and store in an airtight container. After about a week, the sugar will have absorbed the glorious aroma and flavor of the vanilla beans. Use it as you would any other sugar - if nothing else stir it into your coffee! But if you want to really layer vanilla into a recipe, substitute vanilla sugar for regular sugar, and add any additional extracts as usual. It's really, really nice in cakes and frostings. REALLY nice.
When making vanilla sugar, do NOT toss the beans! You can reuse them over and over - they will work to perfume and flavor sugar for about six months. Just add more sugar to the container as you use it. Even better? At the end of the six months, just when you think those poor old vanilla beans have given their all to the confectionery world, grind them up for ground vanilla. Pop them in a spice grinder (extra coffee grinder) or in a small food processor and process until powdered. This ground vanilla can be added to recipes just as an extract would be.