As far as I can tell, enabling this option doesn't change the effects of modifier keys in any other program except Illustrator. In fact, weirdly, it doesn't affect the other uses of the modifier keys in Illustrator -- holding down the option key will still switch temporarily to the most recently used pointer tool, for example. But if you're having modifier-key troubles, it's worth checking this out as the source.
[robg adds: I'd never even noticed this option in Terminal, and it took a trip to the Help to figure out what it's for. Help says:
You can set up Terminal to allow secure keyboard entry. This prevents other applications on your computer or the network from detecting and recording what you type in Terminal. Before you turn this option on, make sure other applications on your own computer don't need this information.So it seems that, for some reason, Illustrator is affected by this blocking...]

