Fair use scenario - Kathy and the IWB

In a continuing series of scenarios that explore educational fair use issues. You comments are most welcome.
Third grade teacher Kathy was one of the lucky ones in the school who has an interactive white board installed in her classroom. As she experiments with the equipment and software, she is finding that many of the activities in her reading series work well as interactive lessons. Kathy has been scanning parts of the series' student workbook for use with with IWB software.
- What is the copyrighted material? Who owns it?
- Does the use of the work fall under fair use guidelines? Is the use transformational in nature? Can this be considered "educational" use?
- What is your level of comfort in helping create such a product? Are there any changes or limits you might like to see that would make you more comfortable with this project?
Your level of comfort with this use of copyrighted materials: High 5 4 3 2 1 Low
You comments are most welcome.