In the Prederence dialog of DNG Converter, there's is an option "Compression", does it compress the JPEG preview or the DNG file?
Since the compression is a "lossless" compression, nothing is lost except file size. I saw a string where somebody had asked why his resulting DNG files were so huge? The answer he received stated that he shouldn't have unclecked the "lossless compression" option from the "change preferences" menu.
So basically, I don't know precisely what the lossless compression compresses or what the "extract" button--as opposed to the "Convert" button--does, but I can tell you that the G10 RAW files (*.cr2) get converted flawlessly to slightly smaller *.DNG files. Enjoy!
As per definition in the DNG specification the comression compresses the RAW data of the image (Lossless JPEG algorythm)
It makes no sense to compress a JPG preview as this image is anyway compressed and smal.