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What a slap to the face. Apple uses their technology then tells them they can't use it themselves without offering in app purchases?!?!

Not exactly. If you haven't read about it, Readability (Arc90) has a new subscription model[1]. That's the point of contention.

(Not that it's any less stupid.)

I know about the subscription model; I'm a subscriber.

I could be wrong, but I don't think Apple actually used their technology, but rather implemented a similar feature into desktop Safari.

Actually, if you look in the Safari 5 credits, you'll find reference to the original Readability script. Here's the official Readability (arc90) blog post about it: http://blog.arc90.com/2010/06/10/why-we-built-readability/