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Pencil and paper? My god... Use the reader's highlight function, for crying out loud!
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Actually I've also found it to be much quicker to use pencil and paper when proofreading (don't need to mess around with clicking through menus to take notes or while making the corrections).
For archiving I would use XHTML. Yeah OCRing can be a pain, but it only takes me a couple of hours of work to get the OCR'd text fairly clean on the PC (would probably be less if I took the time to build a decent scanning cradle), and a quick read-through on my reader to catch the rest.