Ahoy! Let me give this the time it deserves, and take some pics of the rest of the setup - the pics above were taken for an audience that was familiar with that particular kit. I can do it better than that fer ya.
It's a pretty slick setup though - that blue ****** you see up there is a polyethylene breather which is kinda like Gore-Tex: water molecules can't penetrate it, but water vapor molecules can... and yeah, billet aluminum for the manifold. Total cost with shipping $70.
There are actually five different things that get vented higher: rear diff, electronic locker, front diff, transfer case, and transmission. Each has a breather already, and the front three are mounted fairly high in the engine compartment, but if you're in there doing it, you may as well do them all.
It's about the change in pressure that happens from a combination of two events: the units cooling down too quickly (from being hot and then being submerged), and then the breathers being underwater when they equalize pressure (thus sucking water in). You can sink the diffs if they're cold without worries - it's just that when they're hot, and they cool down quickly, air must get drawn in - the breathers are there to let that air in there instead of past the seals - but if they're underwater... [EDIT: Mark, above, has it right]
More later.