When I started editing proposals (not manuscripts, as the screens were tiny) on handhelds, I would make a note using brackets, highlight it, and then transfer the file back to my computer (using a USB connection, of course), in a process not that different from what Andrew writes about below. I never got as fancy as document comparisons, and often spent as much time transferring my thoughts back to the author's document from my notes as I did editing. But I could edit on the subway! Inevitably, the novelty of whatever new device I was using would wear off, and I'd rearrange my time to work on computer or paper instead, saving subway and other mobile time for reading. I never understood why these fairly advanced word processing programs didn't have the ability to make comments. I could format, indent, hyperlink, etc., but a simple commenting feature was somehow too advanced.
Then came the ereaders, and things changed again, especially when I got the Kindle 2. Now I could read full manuscripts comfortably, and I could make notes. While frustrated that I couldn't get those notes off of the device, the nature of my editing (not line edits) was fairly compatible. The notes on the Kindle took the place of the notes I used to make on a legal pad. I always had to transfer those to my edit letters, so I found it very useful.
Then came the iPad. One device that would do it all! At first, I was using Pages to read and review manuscripts, using a very similar system to Andrew's. Frankly, it was driving me nuts. First of all, the Kindle had gotten me very used to pagination. I liked that the page was static, I could read all the words, and then when I was finished turn to the next page. Pages uses a more typical scrolling UI, which I find unpleasant for reading. It take me too long to get the page centered, and oftentimes, I find that one manuscript page does not fit on one iPad page, which means even more scrolling. Annoying. That's when I said to myself, "Self, wouldn't it be great if I could import manuscripts to the iBooks program? I could annotate like I did on Kindle, have the same static pages that I like, and the text would reflow. If only..." And that's when I discovered Stanza for Mac. The program can convert Word documents into EPUB files, which allows me to then import the file into iBooks (actually, I add the file to Dropbox and then open it directly on my iPad now). I get the reading experience I like along with the ability to annotate, and while I can't export my notes, I still don't mind copying them over. Would I be happier if I could export them? YES. Please enable this Apple! (And Amazon and B&N and all you other people who won't give me my notes!) But for the right reading experience, I'm willing to sacrifice.
As much as I prefer the reading experience in iBooks to that of Pages, I would switch to Pages in a heartbeat if they enable comments. Or a third party app. And if an app would allow for paginated viewing AND comments? I'd marry it.
Happy to answer questions about my set up if you have them! And would love to hear from others about how they work.