the official Windows Phone 7 documentation explains the rest. When storage is added to a Win 7 phone, it performs the following tasks:
It reformats the SD card
It creates a single file system that spans the internal storage and the SD card.
It locks the card to the phone with an automatically generated key.
Once the SD card is integrated, removing it will kill all phone functionality save for emergency calls; the phone will only function if the original SD card is reinserted.http://hothardware.com/News/Windows-Phone-7-Allegedly-Breaks-MicroSD-Cards/
Why bother to put an 'expandable SD card slot' might as well make it like an iPhone and have fixed memory and leave it at that. The more smart phones come to market, the more I can appreciate how many things Apple did right.
To give Microsoft the benefit of the doubt, it sounds like this 'feature' is focused on enterprise business users and ensuring your phone data is secure. But it's still horribly crippling to everyone else who just wanted a phone where they could swap in and out extra memory chips to transfer files and whatnot.
Microsoft doing what it does best: Not thinking about the users.
And I was actually really optimistic about WP7, I was considering getting one.