Exchange 2003 -- Online Defrag is not reclaiming logical space

Perform Online maintenance by following:
http://support.microsoft.com/kb/324358

Then, perform Offline defrag, by following:
http://support.microsoft.com/kb/192185
http://www.petri.co.il/defragment_exchange_2000_2003_server_databases.htm

You need to do an offline degrag.  This will reclaim all space used by the database.  I have done this before and it works.

http://support.microsoft.com/kb/328804

The logical size of the database will never change until you have run the offline defrag.  However, with that being said, yes you will still receive the events but you have (in a blind way) gained that space back to the DB.  As JBond stated, run the Offline defrag.

I just realized looking back at some emails, that I might need to reduce the retention period for deleted emails.  

Can anyone confirm this will work?

Step-by-Step Guide to Increasing the Exchange 2003 Private Mail Store Size on Windows Small Business Server 2003

https://www.experts-exchange.com/questions/25102781/SBS-2003-mailbox-size-limits-increasing-default-limit-concerns.html

http://www.petri.co.il/change_store_size_limits_ex2003_sp2.htm

http://technet.microsoft.com/en-us/library/cc708008%28WS.10%29.aspx

when I do this type of maintenance, I set the the retention period to 0, then back to 7 when done.

may want to check these out

https://www.experts-exchange.com/Software/Server_Software/Email_Servers/Exchange/A_2730-Exchange-Offline-Defrag.html

https://www.experts-exchange.com/questions/25856577/Deleted-about-20-GB-of-email-from-Exchange-2003-no-reduction-in-drive-size.html

Your retention settings will come into play only if you have limits set that are in conflict with what you are trying to accomplish.  If you deleted mailboxes today and are trying to reclaim your space today, you will need to change your limits.
untick the "Do not permanently delete mailboxes and items until the store has been backed up" on the "Limits" tab of the Mailbox Store's properties.
While on the topic of backups, make sure you are using the option to "Flush commited logs", these log files can really add up over time.
 
Here is a good site explaining the limits and recovery of your mailboxes should you decide to change your retention policies.
http://www.msexchange.org/tutorials/MF022.html 

That is true however it will not release the allocated disk space.  In other words you will never see the whitespace as disk free space unless you offline defrag.

correct, you will not see the free space but you don't necessarily have to do an offline to see it. check out the links in my post

Also, look for 1221 events in the Application log that will show how much whitespace is in your DB. This is the amount of space that would be reclaimed if you decided to do an offline defrag.

I could care less about disk free space -- just need logical free space in database to keep it below the limits.  

After reducing the retention period for delete items, the online defrag last night, reclaimed 2GB so far.

Thanks everyone.