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Please recommend applications suitable for teaching literacy:

Stanza

Stanza (currently iPhone/iPod Touch app) is a great free app with access to 100,000+ ebooks. Many of classics (ones that are out of copyright) are available for free and can be downloaded directly from Project Gutenberg within the application.

StoryKit

To teach storywriting I can highly recommend storykit that allows you to place images next to your writing and have it work as a type of book.