sd-ext is a second partition on the phone's external sdcard. Note that sd-ext is NOT your external sdcard storage partition (/sdcard, /extSdCard, /mnt/sdcard etc.)
Normal operating systems like Linux, Windows etc. allow you to store different types of applications on partitions of your choice. Android however uses apk files (Special ZIP Files) to pack applications, and it stores both the application (APK) and all of it's data like libraries and user data (Settings and such) on the /data partition in specific sub-folders. The OS is not built to look for applications and data elsewhere, so if you run out of space on this partition, you will be out of luck. Especially since you cannot upgrade the internal NAND storage.
The concept of sd-ext was created for this very reason. It enables you to move some of the content from /data and place it on an additional partition on your external sdcard (sd-ext), something that you are able to upgrade. The problem however is that Android, like mentioned above, is not able to look for applications and other types of data outside the /data partition, so whatever you move to sd-ext, will not be located by Android. This is where the sd-ext scripts comes in to play. The trick is to make Android think that everything is still located on the /data partition, while in fact it is stored on the sd-ext partition. The way this works is that the sd-ext script moves one or more sub-folders from /data to sd-ext, folders like app which stores the APK files or data which stores the user specific app configurations. Once moved to sd-ext, the script will then mount (link) each sub-folder from sd-ext and back to /data where Android can find it. Now every time Android accesses one of these moved folders to read, write or store files, Android will in fact be using the files from sd-ext, even though it accesses them via /data.
Only use this tag when your question is truly specific to sd-ext, mount2sd and using SECOND partitions on Sdcards to virtually increase internal memory or other purpose.