No, they're not encrypted. Each disk has a map on it (the file allocation table) that says exactly where on the disc a file is to be found. When a file is deleted, its entry is removed from the file allocation table, with the result being that the space on the disk it occupies appears to be free for use.
When you "delete a file" in Windows, Windows doesn't delete it, just moves it to another directory (an action which is itself just a matter of editing its record in the file allocation table) that the operating system treats in a "special" fashion. What that special directory is called depends on what version of Windows you're using. Windows 95, or 98, it's just "C:\RECYCLED"; NT (including 2000) has a different directory for each user (all subdirectories of one Recycled directory in the root).
