How do you encourage students to read the entire novel online?
While I encourage reading online, in no way do I ever discourage reading real paper books. As I've written before, it's not paper I'm against -- it's a paper-knowledge mentality I'm in opposition to.
I do think that Open Library and upcoming handheld devices are going to make it much more comfortable to read online in the future and I (and my strained eyes) look forward to that day.
In terms of actually using a novel in class, however, I always post the sections we are doing a close-reading of up on the wall via an LCD projector. It's then easy for me to mark it up via my tablet-PC. Often I will then post the day's notes to my blog as jpgs. In addition, my students mark up their own digital copies of the text and save their notes on their blogs.
Over the course of the year, the students unwittingly develop a wonderful digital portfolio that demonstrates their progress. And -- and this is something else cool about the dynamism of Web 2.0 -- is that the students can go back, revisit their notes, and link their notes to digital sources and scholarship online. In effect, their notes taken in class -- written on a digital version of the very text itself -- becomes a hyper-linked annotated bibliography. That's something that you just can't do via an overhead transparency.