I work principally in academia, and I recently bought a Kindle to cut down on printing costs for PDF files (acquired from various sources, principally JStor). I find it increasingly unsatisfying.
1. I have to cross-reference page numbers for every citation. When you're talking about hundreds of citations from dozens of sources, you come to regret not reading the originals in the first place. I don't see the day when citing Kindle locations becomes acceptable among the standardized citation guides (MLA, Chicago, etc.) since many users convert PDFs by themselves, and different settings (e.g. omitting introductory pages, dedication pages, title pages, etc.) mean different locations.
2. Annotations. Everyone tells me how easy it is to insert notes and highlight passages, but the currently available methods do not give me the same flexibility as a simple pen:
2A. Discontinuous highlighting/underlining. Sometimes I don't want to highlight every word in a particular passage, but Kindle does not allow me to do this; as soon as the highlight ends, the next highlight can only be treated as a completely new annotation.
2B. I can't draw. Arrows, lines, maps, even illustrations are an important part of my annotation process. On the bottom of one section of Plato's Meno, for example, I have about a half a dozen drawings trying to make sense of a particularly interesting geometry problem (about which several papers have been published) [1]
2C. Multiple language/character support. This is a particularly difficult issue when dealing with translations. Even if I'm not reading a Greek text, I may be on-the-fly translating between English, French, German, and Greek (often 3 or even 4 of the above within the same paper!). As such, quite a few of my notes are in Greek, and so you can imagine my disappointment with the Kindle.
3. Jumping between passages is difficult. Sure, I can search the text - but I guarantee that's actually slower than flipping through pages. And if I direct students to a particular passage? That one kid using a Kindle in the corner of the room is still looking for it by the time we have moved on.
These are not all just Kindle problems, they're obstacles that eBooks and their complimentary software have to overcome to actually obsolete the physical book. I don't mean to suggest that these issues can't be overcome [2], but I believe the paperless revolution is much further away than some like to believe.
For the small amount of for-pleasure-not-work fiction that I consume, I'm probably not going back to paper.
[1] http://homepage.mac.com/jholbo/writings/dialogues/meno/meno9...
[2] No doubt the failure to adopt these features stems from low demand -- most of the demand in the industry is for popular literature, not the sort of people who are writing all sorts of things in the margins of their books. There are also some curious UI/UX problems that need solutions, e.g. scanning pages.