Surprisingly, there are a lot more sources for legal free books online than one might think. You can find quite a variety, ranging from plain vanilla text versions to books that have been lovingly formatted by ebook aficionados. Most of these are DRM free.
Amazon and Smashwords both offer free books fairly consistently. Most titles that are offered are free only for a short time, so it is best to download them when you find them. Sometimes a book may only be free for as little as a few hours; most titles are free for at least a day or more.
Public Domain Books:
Project Gutenberg: www.gutenberg.org You can choose between ePub, Kindle, HTML and simple text formats.
The Internet Archives: http://archive.org Offers over 2 million items in a variety of books and texts of all kinds.
Mobilereads Forum: The Patricia Clark Memorial Library: http://www.mobileread.com/forums/forumdisplay.php?f=137 Public Domain works formatted and archived by Mobilereads members.
Feedbooks: http://www.feedbooks.com/ Offers free Public Domain and original books as well as new releases from major publishers. Requires registration.
The Free Library: http://www.thefreelibrary.com/ Over 16 million items, ranging from literary classics to periodicals from many fields.
WikiBooks.org: http://www.wikibooks.org/ Offers open content textbooks that anyone can edit.
For the Kindle specifically:
Mobipocket: http://www.mobipocket.com/freebooks/default.aspx Includes a variety of Public Domain non-fiction and academic works.
Free Kindle Books: http://freekindlebooks.org/ Many of the files offered here are Project Gutenberg files that have been reformatted to look better on the Kindle.
InkMesh: http://www.inkmesh.com/ Ebook search engine to find and compare prices on books for Kindle, Sony, Kobo, Nook and more.
Just Free Books: http://justfreebooks.info/ Audio and ebook search engine.