Version: (using KDE Devel) Installed from: Compiled sources In the composer Edit->Compress spacing should ignore quoted text because else it's pretty useless for replies.
Works as designed according to the answer in 48541.
To be precise, it works as advertised (in the documentation). But this doesn't make the behavior correct. Otherwise I wouldn't have filed a wish for changing the behavior.
Fixed in KDE 4.3.