Here is a site worth checking out for picture books. At Big Universe you can read, create and share children's books. Each week they feature at least two free picture books to read online. I searched through their books and was able to read several picture books for free. This weeks free books are Kids Around the World and Is a Worry Worrying You?
You can also upgrade your membership, which will allow you to publish books written by children (or you!). The upgrade fees are anywhere from $6 per month to $50-80 per year.
Does anyone else have an online (or other) resource where students can create and publish books?