Some apps are officially supported to be moved to SD card/Internal Storage.
When you move an app to SD Card, the app (most of it, and it's data, including the update files) is moved from the Android/app partition of your device to your internal storage, both of them being part of your total phone memory.
Previously, Android used to create a folder named .android-secure in your main storage.
The storage that you see available in Android, is like a drive of a disk. In which you store PDFs, Movies, Music, etc.
When you plug in device to a computer, this is the storage which you will see as mounted. This is the storage to which you can copy videos, music, etc.
However, on the same disk of the phone that comes as is (w/o putting external sd card), Android creates partitions, like system, etc, data, etc. These are also on the same disk.
Just imagine a hard disk with windows, and moving a program from C:\program Files to D:\ where you have more space. D:\ is the space where you can copy things and store pictures, etc. Its your storage that is made available to you.
This is the storage with maximum size, and is also called Internal Storage/USB Storage. So if your phone tells that you have less memory to install apps, since your app partition is limited in size, you can move big apps like Angry Birds, Gameloft Games, etc. to internal storage, meaning in the space that you store your data, which is visible on connecting to computer - and can then conveniently install more apps in the app
Putting an external memory card is like adding a new hard disk to your computer. On which you cannot move apps officially.
However, if rooted, you can symlink, meaning create links to external sd card with more storage, and let Android think that this is Internal SD card.
