When you specify the TERMINATECHILDREN="TRUE" value in the VIRTUALENV element, then all processes that are running in the bubble are killed when the main application closes. The name of the element might let you think that only child processes of the executable that you specify as FILENAME in the CODEBASE element are removed, but this appears not to be correct. This also means that any script that you still have running in the background can be killed, or a command prompt that you opened up for troubleshooting.
In my opinion you should be careful using TERMINATECHILDREN, since the child executables and other processes can also perform I/O operations that might get interrupted. If you want to alert the user of the killing of background processes and make them aware of this danger, you might want to check out the LaunchIT utility from Tim Mangan. This utility monitors all child processes that are launched by the main process and optionally alerts the user when child processes remain once the main process has closed.
For more information, see the OSD illustrated which also explains this, or Microsoft KB 931589.