1. what is the best way to update the firmware on the 7800?
.. Failrunner has suggested that SD update method can lead to problems
.. http://boards.dingoonity.org/jxd-devices/s7800-do-not-use-sd-card-flash-method-for-firmeware-upgrades/
I've used the SD card method and had no issues. Should be fine doing it this way.
2. Does this also update the recovery firmware? so If I recover later It will revert back to 1.08?
Hmm... not sure. I don't know if the stock recovery is altered by the upgrade method. I believe the updates JXD has been providing are just kernel changes impacting the system partition. To go back to 1.08, you'd have to flash a 1.08 update, or you'd need to make a backup of your system (ie: CWM NANDROID) prior to upgrading.
Personally, I wouldn't worry about ever rolling back to 1.08. Although there's possibly new bugs in the firmware updates, I don't think 1.08 was gold by any means (in *theory*, these should be incremental improvements). I think a lot of concern stems from the fact that people reported that the firmware upgrade to 1.09 resulted in problems for them (for example, people reported not being able to charge after updating), but we don't know for sure it was the upgrade that caused it, I suspect it was coincidence, or some nasty side effect of not having proper root access at upgrade time).
3. How does this effect the Internal SD card partition?
I don't think there's any impact whatsoever.
4. What happens to apps? Im guessing playstore apps will reinstall (it seems to keep a list?)
and near as I can tell app sync their data online? is this all play store apps or just those that support sync?
What about sideloaded apps.. Im assuming I'll have to start fresh?
5. What happens to system setting? I have pretty much crawled thru every setting page I can find I'd hate to loose all my settings.
As you've already discovered, no impact in this case. These updates seem to be dirty flashing kernel fixes, so apps aren't impacted (the upgrade does not wipe the data partition). For the most part, I would say system settings should be preserved as well, but given that it's over writing system data, that may not always be the case.
If you are concerned about this, check out Titanium Backup, it allows you to backup apps+data after full system wipes have been performed.
6. How can I backup my current firmware 1.08? I don't think there is a download fo 1.08 since it was what shipped or is there?
I don't know if there was ever a downloadable update for it. Someone posted in another 7800 thread a link to show how to install CWM. You could install that, and then do a NANDROID backup of your system. That would allow you to roll back to your current state (although you've lost your 1.08 state since you already upgraded). Again though, I wouldn't personally worry about 1.08. I upgraded to 1.09 immediately, and it has been really solid for me. No issues, no reboots.