I didnt't try to reformat, so I do not know what exactly it does. But your assumption that there is different partition for user data and for firmware is wrong (AFAIK). The user data are in one tree-branch (/media/flash, which is the "internal storage") of M92 "firmware" folder structure. Maybe there is also another partition for bootloader or whatever, but most of things ('firmware' + user data) are in one partition.
Maybe that what Onyx calls 'formating' just erases the tree-branch exposed to the user and creates default folder structure (visible to user) maybe it does something more...
As you experienced in 1.7
RC 20120326 it did something more and you didn't like it.
EDIT:
As I do not understand Linux, there might be also possibility that physical partition where are user data is somehow "mounted" to OS ("firmware") file structure. And so it seems like being in one common partition. Linux geeks would have to say the final testament.
