Quick Google search turns up Adobe's docs #1 which explains it quite well:
wmode attribute or parameter Value
Window | Opaque | Transparent Template
(Optional) Lets you use the
transparent Flash content, absolute
positioning, and layering
capabilities available in Internet
Explorer 4.0. For a list of browsers
this attribute/parameter supports, see
Publishing Flash documents.
Window Plays the application in its
own rectangular window on a web page.
Window indicates that the Flash
application has no interaction with
HTML layers and is always the topmost
Opaque Makes the application hide
everything behind it on the page.
Transparent Makes the background of
the HTML page show through all the
transparent portions of the
application and can slow animation
Opaque windowless and Transparent
windowless Both interact with HTML
layers, letting layers above the SWF
file block out the application.
Transparent allows transparency so
that HTML layers below the SWF file
might show through if a section of the
SWF file has transparency; opaque
The default value is Window if this
attribute is omitted. Applies to