You can download free books on a Kindle and listen to audiobooks. Here is a good site that talks about all that stuff.
http://thekindle.wordpress.com/2008/09/23/top-19-amazon-kindle-tips-do-you-get-the-most-out-of-your-kindle/
I have the Sony Reader (rather than the Kindle) because it was slightly cheaper ($299) and I could play with it at Target. I also think that it is prettier. 
Before buying it, I was seriously leaning toward the Kindle, but all the bonuses that are part of the Kindle and not the Sony are not features that I am interested in for the additional price.
There are rumors that the Kindle will be coming out with a larger version next year – big enough to display textbooks, and likely knitting books and stitch dictionaries, if those became available. It is just a rumor, though. And I imagine it would cost more than the current one.
(I haven’t looked to see if there are any Kindle editions of knitting books, but you can request any Amazon book to be made into a Kindle edition. I don’t know what happens after you request it, but they all have a link so that you can ask.)
Both readers use similar technology, and I have to say that I don’t even notice that I’m not reading a “real” book. I have a leather cover and it feels so nice in my hands.
I like that the book is always the same size and weight and very easy to hold comfortabley. I also like that it is so easy to turn the pages that I hardly notice I am doing it! The font size is adjustable too, although so far I’ve been using the default font.
It is just the right size to tuck into my purse; I haven’t taken it anywhere yet but I’m planning to take it to the polls with me on Tuesday and we’ll see how I like it for traveling! (So far I have only used it at home – I’ve had it for about two weeks. ;))