well...if you have two choises, either to format or to upgrade XFree, wouldn't it be a good idea to first try to upgrade XFree and only if it doesn't work, format?
anyway, here's my answer to your question. I'm running XFree 4.4 with my Radeon 7000, and:
1) software runs ok. X runs ok. everything one usually needs works ok. so no problem..
2) hardware (3d) does not run ok, I guess...I don't have that much games or stuff to test this, but at least glxgears and ViceCity won't run on 3d...still, I get no errors and X tells me I'm running 3d nicely (but I really disagree on that)...
the second problem isn't because of XFree 4.4, because I've had this problem on 4.3 too, and this is mainly because I haven't found drivers for my card
newer Radeons, 8000-9000 series, do have drivers from Ati itself (and others?) but mine doesn't...the thing I've tried is DRI, and it seems to work properly, but just isn't. Perhaps I just should dig deeper..
anyway, I would say XFree 4.4 works with Radeon, especially if you do have newer card..
and once more: try XFree 4.4 to see if it works with you, before formatting..