I think you are talking about the Smart Object layer function in Photoshop CS2. May be you can do a post a screen cap here to see exactly what you are talking about.
The masking of layer between a regular layer and smart layer in CS2 is virtually the same. You still can create a layer mask to mask out a Smart Object but you can't link the mask together so if you move the image the mask won't move together or vice versa.