I have even been reading ebooks on a 352x416 Nokia E70. No matter how you format them, smaller screen either makes you squint or taxes your fingers by forcing you to scroll. This is a hard limitation that cannot be avoided by any amount of formatting.

Now, I do have a few ideas about making FBReader more usable on a physically smaller display, both by zooming parts of the text above your finger touching it and by scrolling text when your finger reaches bottom of the screen and/or you tilt the device. These ideas (if FBReader guys choose to implement them of course) will ease the pain of reading books on N900. But having a bigger screen would obviously make things better.