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Originally Posted by RWood
It does free up all the space when you remove a book from the internal storage. Depending upon the type of book you are storing, the Sony Reader will perform some packing (compression) of the file when it is loaded. (LRF files are already compressed.) So even though it may report as a 1.2 Meg RTF file, it may only occupy .9 Meg of internal storage. RTF and TXT files seem to demonstrate this quality while LRF and PDF do not.
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Absolutely right. As you say, the Reader compresses files that you load into main memory. TXT and RTF files can be compressed very efficiently - often to a third of their original size. LRF files are already compressed (trying zipping one - you get little or no additional compression).
Very often, loading a 1MB RTF file into main memory will only reduce the available memory by about 300kb, so naturally that 300kb is all that you get back when you delete the file again. If you convert your 1MB RTF file into an LRF file, it will probably end up at about 300kb anyway.