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I've read several novels on my Droid (same screen as Namekuseijin's Milestone) - it's certainly doable. However, for me at least, it's definitely sub-optimal. At that size I have to hold it very close and remove my glasses to read - and that can be difficult in some situations.
I can do it - I have done it and will again - but I am more comfortable with a larger screen and larger font size. It lets me focus more on the words and less on the mechanics of reading on the device.
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