I've been using Google Reader's mobile edition for a while (first on a blackberry, and then on an iPhone) and in general it worked out OK. There were a few problems with the UI in that it was designed for small screen mobile devices. One of the problems is that it was very much screen-refresh related; so each time you pressed a button you had to wait for the entire screen to redisplay (you can see it from an ordinary web browser too). Whilst the iPhone has the grunt to render Google Reader, the size of the display meant it was pretty unusable.
The new version of Google Reader for iPhone has the same usability as the main version; it's AJAX and so can be downloading the next page whilst you are reading the last one. The UI has been resized to better fit the iPhone screen, and works as you expect. You can even try it out on the Aspen simulator.
And to answer AppleTell's question; yes, you keep track of what you've read on both the main version as well as the portable one (though this is true of the other less capable interface too.