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despite the theme of this thread, space isn't really an issue. after all, i can only read one book at a time! even on the PRS-300 you can throw a few hundred RTF files on there at once, which is quite a lot more than enough.
i know the RTF filetype gets a lot of badmouthing here, but i still like it. it's dead easy to format, and it seems to look good on the Reader. i don't bother with images or TOC or any fancy stuff since i just read fiction. it just works for me...
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