I think it is likely Apple will approve the app based on the criteria we've been presented with so far. A e-reader is not a bandwidth hog, has no reason not to shut down and restart when the user switches between applications, and doesn't even have a large storage requirement.
I do have two questions that I have yet to see answered: what kind of local storage do apps get, and how can they sync with a desktop or on-line repository? To put it another way, how would I get books onto the iPhone in the first place.
Will Fictionwise charge for the App, or use it as a razor to sell the books?