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When you talk about free books, are you talking about classics out of copyright or free promotional books? If you want the classics, you can get very nice versions here at MobileRead, for free. Most of these books are posted in multiple formats, but it is simple to convert DRM free books from one format to another in Calibre. If you mean promotional books, Amazon probably has the largest collection of free for a little while books. Many of these books have DRM that you would have to strip before converting. In either case, a Kindle could work for you.
I've never heard of DNR encryption and agree that you should check with the librarians for a list of readers that are compatible with the library books.
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