The March/April 2008 Issue of Building Products has a good summary for clarifying the use of formaldehyde in building products. There is no web link, unfortunately, so I will copy the article here.
Most structural engineered wood is glued together with binders that contain phenol formaldehyde, a product with minimal off gassing. The binders used for some non-structural, interior grade products, like particleboard, MDF, and hardwood plywood, however, can contain urea formaldehyde, a volatile compound that is classified as a carcinogen. Urea formaldehyde is also linked to respiratory problems, eye and nose irritation, and allergic reactions. The telltale sign of its presence: the sweet smell that most kitchen and bathroom cabinets emit.
New regulations in California will restrict urea formaldehyde emissions, but do not deal with phenol formaldehyde. In response, manufacturers are developing formaldehyde-free binders, using products like polyurethane and even soy. Last summer, the California Air Resource Board adopted new caps on the amount of urea formaldehyde used to bind wood products used indoors, to take effect in 2009.
While UF binders are significantly less expensive than PF binders, they give off a lot more formaldehyde—a volatile compound that is classified as a known human carcinogen. Source: BuildingGreen.com, article:Binders in Manufactured Wood Products:Beyond Formaldehyde
Given the concerns about formaldehyde, a lot of R&D is going into formaldehyde-free binders for manufactured wood products. Researchers at Oregon State University, inspired in part by the ability of mussels to form an extremely durable adhesion underwater, developed a formaldehyde-free, soy-based binder, now produced by Hercules and used in Columbia Forest Products’ PureBond hardwood plywood (see EBN ). Because most binders are more expensive than UF, we can expect manufactured wood product prices to increase to some extent as UF is eliminated.