To answer your question, let's break it up into two point of views:

1) From the Point user perspective:

When a Point user is accessing "PDS Accelerated" data folders, the answer is "Yes", the flat files are completely gone. 

The user interface is still the same, so Loan Officers and Processors still use the same Point screens to search for files, open files, save files, run reports, etc...  Point "talks" to PDS (through HTTPS) to open, update, save or delete loan files, and the Point user does not have "direct" access to the flat files. 

Note: Point 5.1 still allows you to work with conventional Point data folders; in that case, the user can still access the flat files, do a "Save As..." to any directory in the file system, etc... just like before.

2) From the System Administrator's perspective:

On the PDS server itself, the flat files are still there.  As *.BRW and *.PRS files are updated by Point users (as BetaFisch mentioned, through the PDS Web Service), PDS updates it's index, which is stored in a SQL database.

When importing a conventional Point data folder into PDS, the system administrator is literally copying the flat files to the PDS server.  During this import, PDS will scan the flat files and update its index in the SQL database.

System Administrators should also back up the PDS data folders (which look like conventional data folders but are just placed in a specific PDS "Working folder") just like they did before: copying the phyisical flat files to tape, etc...

Hope this clears it up.