The "Preserve HTML in replies" option only has any meaning for messages in multipart/alternative format - that is, the format where the message contains both a plain text and an HTML version of the same message.
If someone sends you a pure HTML message (i.e, one where the only part is an HTML part), then there is no text version for me to fall back on, so I have to use what's there. I tried tag-stripping the HTML at one stage, to produce a "plain text" version, but it doesn't work - there's just too much going on in an HTML message to be able to do that (the results were unusable at least half the time).
It's just one of those things, unfortunately. If the only content I have available to me is HTML, then I'm more or less forced to take it formatting and all.
-- David --