Background location works at two levels, allowing location applications to be aware of your whereabouts, even if you don't have the app open. Applications like TomTom would run this service in the background, so you can look at other apps while the GPS still tracks where you are. When it's time to take a turn in your planned route, TomTom will tell you using the background audio service. All without having to leave whatever software you are running in the foreground.
It works similarly with other non-GPS apps that need location services in a less active way than a driving app like TomTom. Those apps can use 3G cell-tower triangulation to know exactly where you are, alerting you of friends proximity or things happening around you.
http://m.gizmodo.com/5512656/how-multitasking-works-in-the-new-iphone-os-40