To jwhayn's personal observations (which I can't match yet, but I'll get there, I'm sure) I'd like to add this "nutshell" answer: the most significant
physical difference between the two devices is the display. The 1150 has an LCD display, and the Reader has an e-ink display. This difference brings several practical differences with it. jwhayn has already mentioned the readability, there's also a huge battery life advantage to e-ink over LCD, you'll see something on the order of 3~4 weeks of battery life on a charge with e-ink, versus a day or so on the LCD. Plus, the Sony gets that with a much smaller and lighter battery than the 1150 has, which makes it more compact and lighter.
The downside to that is that e-ink displays are a lot more expensive than LCDs displays are, which is where you get the price difference.
I believe that the 1150 won't handle RTF type files without conversion, which the Sony will, which may make it easier for you to use. If I'm mistaken I'm sure someone will happen along and correct me.
One other point I'd like to make is that the higher prices you're seeing in the Connect Store are for books that are still in their 'hardback' stage. It does take Sony a bit to notice that they've left that stage and adjust the prices appropriately, but they seem to mostly get around to doing so, eventually. Further, there are a number of other places to get books. In fact, if you're willing to mess with converting them, you can buy .LIT (Microsoft Reader) format books from Fictionwise and convert it to a format that the Sony Reader will display. I can certainly understand not wanting to mess with that, however.
Hope that's helpful to you.