Access to Apple's digital-books store comes though the iBooks app, which is not bundled with the iOS4 update. To get it, you have go to the App Store and download it free of charge. If you're familiar with the iPad version of the app, you'll feel right at home with the iPhone app, which has the same interface.
You can buy and download books from Apple's iBooks store straight from your iPhone, or add your own PDF files by connecting the iPhone to your computer. If you have an iPad as well, iBooks will keep in sync your notes, your bookmarks, and where you left off for each book.