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Can books be transferred to the ipod touch using the usb cable or can it only be done wirelessly?
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Wirelessly. I just set it up on my iPod touch. You start the app and it will give you a registration screen where you input your Amazon user name and password. All the books you have purchased then show up on a list in the app and can be selected and downloaded to the phone.
When you now go to a Kindle book purchase page (on a PC or browser on the phone) one of the options to send it to when you buy is your phone or touch.