More Words, Deeper Hole

You can read PDFs on the existing readers -- I read them on my Sony Reader all the time. I don't know how it stacks up compared to the Iliad, which another person suggested, but it does work. (The one obvious advantage of the Iliad with reference to your complaints is that it's larger.)

I don't think it's a failure of ergonomic design so much as trying to make an initial device that appeals to the largest number of people possible. A smaller-than-letter size device is MUCH more appealing for the majority of people for whom eReaders are useful. Eventually, one presumed that the market will open up to the point where more specialized devices for people whose needs aren't covered by the mass-market devices will happen. eInk can be scaled to larger sizes -- it's just a matter of needing to do what's best to grow the market first. I think the astoundly weird feature set of the Kindle 2 is good proof that we're still in the "figuring out what consumers want," phase of things.