it is short for Pre-amp/processor. It takes the signal from your source components (dvd player, vhs, sat, cd player, tape deck etc.) and passes it to the amp then on to the speakers... so it is in the signal path to pass the signal or process it before you hear it. Hope this helps...
It does decoding, processing, and line level volume control before the audio signal is passed to an outboard power amp or amps. Many also do video switching, and some have a radio tuner.