What's happened to SQL_PRESERVE_CURSORS in SQL 7.0?

A. It was broken/changed from 6.5 in 7.0.

SQL 6.5 - SQL_PRESERVE_CURSORS apply to both COMMIT_BEHAVIOR and ROLLBACK_BEHAVIOR 

SQL 7.0 - SQL_PRESERVE_CURSORS only apply to COMMIT_BEHAVIOR

SQL 7.0 SP1 - As 6.5

SQL 7.0 SP1 with -T7525 traceflag - As per 7.0

Look up:

See http://support.microsoft.com/support/kb/articles/Q199/2/94.ASP for more info