It refers to an old Microsoft tactic from the pre-US v. Microsoft days. It's much more then an abusive business practice however, it (should be) our rallying cry as progressives.
The simple version is this: You take an open format. Lets use HTML for an example. You embrace it. Internet Explorer went everywhere, tied into the OS so deeply you couldn't remove it and still let the machine function. You then 'Extend' it, add proprietary features, add-ons, what have you that aren't part of the spec. Use behavior thats not part of the spec. ActiveX, rendering 'quirks', IE-specific tags were all used. And eventually that becomes the de facto standard on its own. Remember the 'Best Viewed in Internet Explorer' badges you used to see everywhere? So at that point anyone putting together a web browser has to render pages not as the spec would have you do it, but as IE did it, so that users got the 'expected' behavior. Aside from being sleazy business, as a tactical matter it makes sense.
Where does this get into politics?
We need to snap up the moderates. The GOP is kicking them out.
Embrace the Moderates, Extend your Politics, Extinguish Opposition.
When we welcome people in, people who are left-leaning for the most part, but not to the level we are, it does a few things. Less importantly, it makes it harder for fox to say we're fucking scary-ass commie pinkos, as most of, say, Wyoming or Utah thinks we are. A party that swells to the size we are getting to just can't be painted that way, not with that many members out there in the community, doing things the 'Real Americans (tm)' (whoever the hell those are) do.
And it starts shifting the majority of governing in the country from the center of the liberal-conservative axis, to the center of the Democratic Party, which is by nature going to be more left then center. By extending the party out to all, swallowing up a lot of the centrists (center-left and center-right) you can swell it enough that the important debates are intRA-party, not intER-party. The far right gets cast out of the discussion all together with only a handful of seats.
Add a few more senate seats to our side (Maybe Crist, as a front page post speculates) and we wont have to worry about holding every single damn D on every vote against perpetual Republican filibusters. We can debate as a caucus, see where we stand, and pass a liberal bill. When the left is the new center, the progressives are the new left. And it can go from there. As policies work, as good things happen, as people see what we put in place, the extinguishing begins. The center is dragged, slowly but surely, in a more and more progressive fashion as people who like the things we do vote in an even more progressive senate, and so on and so forth, the new 'far right' getting left behind with each molting like a snake skin.
Embrace, Extend, Extinguish.
Embrace Moderates, Extend your Politics, Extinguish Opposition.