As far as I know, anyone who has asked Amazon about it was told that it is perfectly allowable to loan a Kindle with books on it. The TOS does not, however, allow breaking the DRM for any reason, including format shifting.
Also, as far as I know, US law doesn't address the case of loaning a Kindle, but does prohibit breaking DRM.
For myself, I've decided I'm comfortable with breaking the DRM but I'm not deluding myself that I'm abiding by the TOS rules and US laws.
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