A password lock forces the user to enter a password the next time they wish to use the BB. A keyboard lock locks the keyboard and the user has to actually hit the lock button on the top left to unlock the keyboard first before entering the password.
I use the password lock to ensure no one can pick up my phone and start reading what's on it. I hate, however, having to hit the unlock button first before being able to type in my password.
It didn't work this way before upgrading to OS 5.