Preserves Transparency.
For instance, if you have Preserve Transparency (Lock Transparency in later versions) checked in the Layers palette you wont be able to paint or do anything to the transparent areas of that layer, though you will be able to paint on existing pixels.
It does what it says on the tin! 🙂
Work through the following, and see if it makes the light go on:
New Document, 800pxW × 600pxH, 72 ppi, Background Contents = Transparent. Press "d" to set Foreground/Background colors to Black/White respectively. Draw out a 180px × 180px square marquee selection somewhere near the middle of your document. Doesn’t have to be exact.
"Option + Delete" to fill marquee selection with Foreground/black. "Command + D" to deselect marquee.
"Command + Delete"…see how it fills the entire document with Background/white? Undo that last step, and Click on the "Preserve transparency" box for your "Layer 1."
"Command + Delete" again. Now, see how just your black square gets filled, leaving the rest of the document transparent?
UN-check the "Preserve Transparency" box.
Filter—>Blur—>Gaussian Blur…set it to about 30 px. and Apply. "Option + Delete"…see how the entire document gets filled with black? Undo that last step, and check the "Preserve Transparency" box. "Option + Delete" again…see how the blurred/semi-opaque areas are now fully filled to 100% with Foreground/black?