I stopped by the Overdrive booth yesterday in order to pin down a definitive statement on Kindle library ebooks. I ended up with a rather disappointing conclusion.
About a month ago Amazon announced that the Kindle would gain support for library ebooks some time this fall. OverDrive were announced as a partner for the deal, with the obvious implication being that OverDrive would do the actual lending.
OverDrive put out their own press release that day, and there was one rather interesting but vague detail about library's existing ebooks. It was implied that somehow or other they will be available on the Kindle. I can now confirm that.
I'm still not sure how they plan to work the technical details, but my source was quite clear. If a library owns an ebook in Mobi, Epub, or PDF, that eBook will be lendable for the Kindle. My guess is that Amazon will accept the library ebook from OverDrive and do their conversion magic on it. The ebook will come out as a Kindle compatible file with DRM and the usual restrictions.
Assuming the above info is correct, then I have to wonder if this might be the source of the Kindle Epub rumor.
The Kindle will be able to use Epub library books. Take that sentence and after it's been passed around a few times I think it might sound like “the Kindle will read Epub”.