Boy, I feel stupid. Hroark explained it all in the OP.
I looked at both the CM7 Kernel Zip and the Zip in this thread. The one in this thread is basically an alternate kernel itself with the change he outlines.
So, that is why you flash the Original Kernel to get everything back. But, I do not think that anything will get moved back from sd-ext to the data partition. And I know that CWM will not restore the sd-ext to the data partition either.
Oh, well. No big deal. Like Optimus said, I could leave sd-ext alone and restore an internal memory only version of CTMOD. Do my thing and then flash back to CM7 and my apps would still be there from before I did the ROM switch.
That is, if I still had any reason to flash back to CTMOD now that Optimus has cracked the PRL problem with CM7. I loved CTMOD, but I love CM7 more. And I like this internal memory extension solution too. Still better than A2SD and S2E, just no utilities to go with it. No scripts, no pointers. Elegant straight from the kernel.
I am sure that a utility could be written to move the data from sd-ext to data and vice versa but definitely not by me at this time. And like Hroark said, I am sure that Kouma could implement this same scheme in his kernel in minutes, so that it would also work with CTMOD. Then I could switch between the two ROMS and kernels and have the same data partition on my SD. Probably more complicated then just rebuilding the Dalvik, in that case, I guess. But, most folks might would rather stay with the methods that have GUI based utilities to move stuff around, like S2E and A2SD.
Awesome, Hroark. It is kind of like the opposite of a magic trick. It is actually more elegant the more you understand how it works.