I'm not Jaed, but I will try to answer your questions.
The only DRM-content the Reader will display is that bought through the Connect store. And copying files to the Reader is done either with Connect or by using a card-reader to put the files directly to SD or Memory Stick cards.
The iLiad so far can display password protected PDFs, although there seems to be a small bug with the password box, it will only show up when the screen gets refreshed, i.e. by activating the on-screen keyboard.
Files can be transferred to the internal memory over USB, but the cards are not accessible over USB atm.
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