Here is my list of sites for free Kindle compatible eBooks:
List of Books Eligable for Kindle Owners Lending Library - You can borrow one a month free with Amazon Prime. You have to buy the book from your Kindle, not from a PC. I found you can send a sample to your Kindle via the PC and then borrow it at the end of the sample from the Kindle.
Books on the Knob Blog that lists current free eBook deals as well as some other deals. The author does a great job of keeping up with the latest deals and freebies. Most are available for a limited time so keep checking back.
Inkmesh is a free eBook and eBook price comparison search engine.
ManyBooks.Net - So far my favorite access to the Project Guttenberg catalog with a nice download interface. Includes reader reviews.
FeedBooks Another very nice interface for public domain books.
Project Guttenberg Magic Catalog - Download to your Kindle and then you can get the Gutenberg free books free via Whispernet. This is a must have for instant access to so many classics.
Baen Free Library - This Sci Fipublisher has been on the forefront of offering free ebooks.
Suvudu Free Book Library - Read the first book of some acclaimed fantasy and science fiction series for free!
Library of America - Story of the Week. You can sign up to be emailed a classic story, essay, poems or excerpts from the publisher of classic works. This is a great way to learn about new (to you) authors and get a little taste. Forward the stories to your Kindle email address or just save them to the device attached to the computer with your USB cable.
The Internet Archive Text Area - The home of the "wayback machine" that lets you look at archived versions of web pages also has a portal to almost 2 million free books and documents. For Kindle look at .mobi files as well as txt files and pdf.
Jungle Search - Jungle Search allows you to run various searches on the Amazon Kindle store. Its handy for seeing books with certain discount amounts, review levels, publication dates, etc. You can turn off public domain books and just search commercial material.
Amazon now has a page helping Kindle customers navigate through Free Book Collections.