For the past few years, the lyrics have been projected. Not sure where they will be projected from this year or how they will do the scrolling (since it seems to constantly change?)
I tend to prefer memorizing lyrics if I am doing a (rare) contest, since I can focus on my performance rather than if I'm getting the words right, but that's personal preference and a tendency to do better on a song I know somewhat well if I have no lyrics rather than if I have them (since I get caught up in reading them off).
The KDD's website is http://anime-karaoke.net/
, which is where you can view their song lists. At the Sac-anime contest, I was able to play a song off my iPod, but a CD is your best bet if the song isn't in the database.
(I have thought about entering this year... not sure yet... I know which songs I'd want to sing, but I'm planning on wearing one of my most elaborate cosplays Friday night, so I'm not sure if I want to cut into that to do the contest... I'm never out to win, anyway, just have fun, so I might as well give that slot to someone else, you know? But I'm still considering it! This past Sac-Anime was my first karaoke contest since ~2007.)