An AP is typically a little embedded machine with special firmware that controls a BSS 802.11b wireless network.
BSS IBSS (ad-hoc)
AP -- N ___N --- N
/ | N
N N ___ N
This all happens at layer 2. IBSS is accessed in "iwconfig wlan# mode ad-hoc", BSS master "iwconfig wlan# mode master" BSS slave "iwconfig wlan# mode managed".
The main advantage of BSS mode is that it solves the hidden node problem... e.g. in a cluttered office, as long as you can see the AP you can see everyone.
There is a mode of operation of the Intersil Prism2 cards (e.g. the DLink DWL-650) that allows for the host operating system to perform functions that the specialized firmware ("tertiary firmware" in the literature) usually does, such as authentication, frame rebroadcast, etc.
The ultimate reason this is really cool is that we can start building open source infrastructures for authentication, inter-AP distribution etc. at the media layer.