Because of the high resolution (320x480) display and the Memory Stick storage, the Sony Clie makes a good e-book reader. Of course, I'd rather read an old-fashioned paper book, but it's not always practical to carry one, and I can't fit 50 books in my pocket, whereas I always have my Clie with me, and can carry a large library on a Memory Stick. Text compresses very well, so the average novel is much smaller than the average MP3 file. Shakespeare's King Lear is a mere 78K when compressed for the Palm.
I use iSilo to read books on the Palm. It can read files stored on Memory Stick as well as files in the Clie's main memory. It has a conversion utility called iSiloX which can convert text or HTML files. I also use the HTML conversion to download content off of the Web to read later. Another pretty good reader is Plucker, which is free and open-source. I find that iSilo feels slightly faster, though.
Project Gutenberg has a huge number of free books in plain text format. This collection contains most of the highlights of classic literature. I download these in text format. Then when converting them, I use the iSiloX option labeled "Convert Single Line Breaks to Single Spaces." This removes the original line breaks so that no matter what font size I choose on the Clie, the text still looks right.
Project Gutenberg can be a little overwhelming unless you already know what you're looking for, because it contains so much. Try out something like Alice in Wonderland to get started. Another good site for documents is Memoware.
(Update: see also TeleRead, a blog about e-books.)