inner class extending

You are allowed to do that but don't expect your C class to use D class instead of A's inner B class automatically.

If that doesn't work (I don't think it will), the following should:

public class C extends A{
  protected class D extends A.B{
  }
}

Well, it will, but what if you have another class named B outside of A?

Edit: nope, it makes no difference. Even if there is another class named B, it will still take A.B. So your syntax is correct.

According to this page, you have the right way figured out to extend inner classes. A few tips about it can be found here, in the middle of the article (search for "extend").