This was one of the big questions I had before getting my Kindle, and I didn't go ahead with getting the Kindle until I was able to check out how the books are handled.
- Anything where O'Reilly offer a Mobi version will of course be fine
- The PDF versions are (even on the smaller screen of the Kindle 2) okay for me - the text is small in Portrait, but not unreadably small (although it couldn't get much smaller and still be comfortably readable) (but please note that my idea of "not unreadably small" seems to be smaller than most people's, so YMMV). In landscape, the text size is close to what it would be on paper, so it's perfectly readable (if you don't mind pressing 'next page' a lot).
- The mobi versions are definitely preferred though: you can highlight and add your own notes, which you can't do to PDFs.
I'd been using my iPhone to read their books prior to getting the kindle, and overall I'm much happier with reading them on the kindle. Better searching, better annotating, bigger screen...
(On the other hand, the ability to read O'Reilly's books is secondary for me; I went with the kindle for purely subjective reasons - it seems slicker, the page turning feels nicer, and I feel like Amazon have a bigger range of fiction. For me, the technical books are just a nice-to-have, albeit a nice-to-have that would be a dealbreaker if absent. If technical books are what you primarily intend to read, something that supports EPUB as well as PDF and has a bigger screen might be a better choice)