I'm not sure it could be used to transmit malware, but once it's on a system it can make it easy to hide it. Here is an example:

First we make our file to hide behind
C:\WINDOWS>echo Test>test.txt
Next we put an EXE behind is, I'm just using notepad.exe because it is convenient.
C:\WINDOWS>type notepad.exe>test.txt:note.exe
Next we confirm what is in the text file when some one tries to open it.
C:\WINDOWS>type test.txt
Test
Now we will confirm the file size, notice that adding notepad.exe as a steam did not increase it.
[quote]

C:\WINDOWS>dir test.txt
Volume in drive C has no label.
Volume Serial Number is 007E-2E3C

Directory of C:\WINDOWS

09/19/2004 08:37 AM 6 test.txt
1 File(s) 6 bytes
0 Dir(s) 19,734,708,224 bytes free
[quote]

Now we can run it. Notice the “.\” in from of the file name, this is necessary because start needs to know the path.
[quote]
C:\WINDOWS>start .\test.txt:note.exe

C:\WINDOWS>
[quote]

You should be able to had just about any other EXE file if you wish.