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I do think the Kindle is currently the best ebook reader out there. But its annotation ability at the moment is primitive at best.
I've found annotating to be one of the main frustrating aspects of the Kindle. At the same time, I understand that it's a difficult problem. To make annotations appear anything like the notes I take in my paper books, they'd have to a) have a touchscreen so I could draw lines of some sort and b) somehow dynamically incorporate the annotations into the display of each page. Either as an image overlay, or by reflowing the book text around my notes. Neither of which are possible on the current technology the Kindle uses.
The problem is that it only displays little numbers like [5] attached to specific words in the text. Yes there's your annotation, but only when you go to the trouble of walking your cursor down the page until you contact the number, does it display the annotation as a mini window at the bottom of the display. Until you do that, there's no way to determine anything about it. A word? 57 paragraphs of commentary?
Underlining works well enough, but there's the problem that as far as I've been able to discover, there's no way to un-underline anything. Or un-annotate for that matter. Maybe you could go digging inside the guts of the text file it uses to store all your annotations and start deleting things (all your annotations in one file, not one per book), but that's not any sort of user interface.
As an ebook reader, the Kindle 2 is great. As a device for making annotations, not so much. I'm looking forward to seeing how the technology develops though.
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