The Baen Free Library is collection of books that the book publisher Baen offers free to the web. They proved that offering free electronic copies of current books actually drives up sales/revenue of the books in print.
The Gutenberg Project "Project Gutenberg is the first and largest single collection of free electronic books". Founded in 1971, it is the oldest digital library and contains over 20,000 books free to the public.
Clasics@MIT has a collection of ancient philosophers, scientists and authors.
Bartleby.com/ has a massive collection of reference and classic texts.
American Literature has a comprehensive collection of classic novels and short stories, including (but not limited to) a large amount of O. Henry stories.
Bibliomania has a collection of short stories and other works. Besides a significant number of works unique to the site, they seem to have a small subset books from the Gutenberg Project as well.
