Fan Fiction.net
A huge site covering fan's written pieces realting to anime, books, comics, games, movies, plays and TV shows. You can read other fan's submissions and submit your own works.
I don't think the site is censored, although it does have a ratings system, so you may want to supervise your children's access.
Google Lit Trips

A Different Way to Read Great Literature!
This site is an experiment in teaching great literature in a very different way. Using Google Earth, students discover where in the world the greatest road trip stories of all time took place... and so much more!
You will need a copy of Google Earth to use these files.
LibriVox - Free Audiobooks
At LibriVox, volunteers record chapters of books in the public domain into digital audio (eg. mp3), and then make the audio files available to the world, for free (through our catalog, a podcast, and bittorrents)
Listening Books - The Sound Learning Library of Audiobooks
Listening Books: Who we are, what we do
We provide audiobooks for leisure and learning on MP3 CD and via internet streaming for those who find it difficult to read or hold a book due to illness or disability, which includes special educational needs such as dyslexia. We have a huge range of audiobooks available for our members, starting from age 7 and going right up to an adult library.
Project Gutenberg - Thousands of Free Books online
Project Gutenberg is the first and largest single collection of free electronic books, or eBooks. Michael Hart, founder of Project Gutenberg, invented eBooks in 1971 and continues to inspire the creation of eBooks and related technologies today.
Read It Swap It
How do I swap books?
The swap process works in the same way that you'd normally swap something. You find something you like, you ask to swap, another ReadItSwapIt members chooses something of yours and you exchange the goods. The only difference with ReadItSwapIt is that the swaps are done over the internet.
The Internet Archive
Universal Access to Human Knowledge
Absolutely masses of free resources including books, audio and video files.