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IWS HTML editor used to reformat the whole original HTML code every time a change in made in Design view. Now we use Mozilla engine for WYSIWYG editing and it normally does not prune white spaces in DOM text nodes. This allows us to preserve the original formatting atalmost 100%. I say "almost" because there are situations when Mozilla fixes DTD violations, thus introducing small changes in the original source code.
We know that most of the users don't want the HTML editor to reformat their code, so we are doing our best to preserve the original source code as much as possible. We provide a "Format" button that performs full reformatting when that is needed.