Android uses a heavily modified Linux kernel that Google-Android development team has been doing since day one and right now the latest release Linux 3.3 Kernel is merged with some Android-Linux codes. This been awaited by so many Android and Linux developers and most likely in the near future Android apps can run natively on plain Linux kernel. The integration became a reality when both Linux developers and Google settled their indifferences.
Improvements are mainly in the Btrfs, memory management, networking, security while optimized power management and other infrastructure that is not included in the 3.3 will be added to the 3.4 version. So if you are interested more about the new Kernel go over to Kernel Newbies and see the changes.