I am running LM 1.0b in Photoshop CS3 for 16bit images on a layer. When activating the Shadows or Highlight previews, the respective areas are not made transparent -- switching to 8bit does the trick. Is this a bug or I am doing something fundamentally wrong?
I am also looking at similar issue for the spots under Virtual Studio Pro, but I will have to get back to you on that.
I did flatten the 16bit image, then had a side by side comparison with the same flattened image converted to 8bit. Then, did apply LM to both but to the respective background layer and it works identically for both H and S buttons... So the issue must be related to a layer setting/quirk in 16bit. I am running CS3 10.0.1.
Another possibility is that you changed/deactivated the transparency display in the Photoshop preferences. But then you would not see a chessboard pattern for any transparent image area in Photoshop.