The term "live" derives from the fact that it does not reside on a hard drive. Rather, it is "brought to life" upon boot without having to be physically installed onto a hard drive.
A LiveDistro does not alter the current operating system or files unless the user specifically requests it. The system returns to its previous state when the LiveDistro is ejected and the computer is rebooted. It does this by placing the files that typically would be stored on a hard drive into temporary memory, such as a ram disk. In fact, a hard drive is not needed at all. However, this does cut down on the RAM available to applications, reducing performance somewhat. At least 256 MB of RAM is recommended, but some LiveDistros do fine with less.
It is often said LiveDistros are a good way to demo or preview an operating system without having to install it to a hard drive.