"Embrace and extend" is a tactic where they "embrace" some technology, protocol, or standard, but then "extend" it with some proprietary functionality. Give their monopoly status on the desktop, the extention becomes a defacto standard. Competitors then can no longer easilly offer products using the extended standard, thus making them appear inferior to Microsoft's products.
So what is Microsoft doing now with USB? It seems they want to add some security features to USB so it won't be as easy for data to walk out of a company in a small USB removable storage device. While this is arguably a problem, I'm sure their solution will include some proprietary and probably patented technology. This will, of course, keep Linux from being able to implement it.
They have outlined a plan for hardware manufacturers so they can be ready with special hardware that will be ready for the new version of Windows codenamed "Longhorn". Linux users will have the option of buying more expensive equipment without the new hardware (since there will be less demand, there will be a smaller supply, so the price will be higher since it will then be a "niche" market), or buying the commodity Windows compatible hardware that will have non-functioning USB ports on Linux.
While I have a strong dislike of Microsoft because of their tactics and a strong dislike of their products because of their inferior quality, I don't question their right to exist and do business. I don't even mind if they maintain a dominant position on the desktop. What I do take exception to is their apparent goal of taking over 100% of the market and crushing all competition. I don't want to run Windows. I want to run Linux. When they, through their efforts to crush Linux, keep me from using and enjoying the product I want to use, I take it personally.