WDS and "extend a wireless network" are two different technologies that do the same thing......allow wireless devices to connect to each other to provide more wireless coverage.
WDS is the older technology and it runs only at "g" wireless speeds. So, if you have older "g" wireless routers, or a mix of newer "n" and "g" routers, you must use the WDS setup for the network.
An "n" device could be configured for WDS, but it would drop down to "g" level performance, losing all of the advantages of faster "n" speeds. For that reason, if all of the devices are newer "n" AirtPorts, you would want to use the "extend a wireless network" setup to allow maximum speeds on the network.
WDS is a difficult and complicated set up for users as well, and it imposes a very stiff 50% bandwidth penalty on the entire network for each "remote" device on the network. So, with 2 AirPorts configured in a WDS setup, you would have a "g" wireless network running at half speed. Add another AirPort to the configuration and the network will be running at only 25% of "g" speeds. That is a tremendous penalty.
"Extend a wireless network" runs at full "n" wireless speeds with much less bandwidth loss on the network. It is also much easier to configure. The only requirement to run the "extend" setup is that all of the AirPorts must be newer "n" wireless devices. If they are, this is by far the best setup to use.
The link in the previous post above provides information about the WDS setup. A better reference might the support article below which explains in good detail all the various ways to provide more wireless coverage, including connecting the AirPorts together using an Ethernet cable....which is the "best" way to do this.
http://support.apple.com/kb/HT4145