Now in english please.
lol. Sorry.
The Linux kernel is the core of Android. It's what directly controls the hardware.
Android is a big program, that runs on top of the Linux kernel.
The Dalvik Virtual machine is a big program that runs on top of Android.
Applications run inside this virtual machine.
Programmers can interact with Android, or through the virtual machine, depending on what they are trying to do. I'll use USB tethering as an example here.
I believe you can USB tether with the Incredible through Sense UI. I know you can with other phones running sense 2.1. You can't do it if you don't use sense. this is because HTC has programmed it in a way that Verizon understands, catches the input and output through the USB cable and passes it on to the OS. Vanilla Android doesn't do this. Neither does the standard Linux kernel used for Android devices.
The function of catching the input and output of network packets through USB can be easily coded into the Linux kernel, and then a small app can be used to route the traffic there. To do this, developers need the source code for the existing Linux kernel so they can add the small amount of code for USB tethering and rebuild the whole thing. The way the current kernel is built, the application sends data to the kernel, and the kernel has no idea what to do with it.
HTC and Verizon have added code into the standard Linux kernel so that the hardware in the Incredible works. If a developer were to build the plain old Linux kernel without these additions, things like the phone, sensors, speakers, touchscreen, etc wouldn't work even though the phone would power on and boot -- the phone would appear to still be turned off unless someone had it hooked to a computer monitoring the system log.
HTC releasing their special version of the kernel source allows developers to add things without breaking other functions.