Our library has books sales yearly where they get rid of there older books. They are in pretty good shape and for .25 a hardcover kids book they are a steal. I've gotten many of my favorite titles this way.
Another good place to find books is garage or estate sales. This is usually the cheapest way to buy encyclopedias. Another great place to look for books and get rid of your old ones is Freecycle. Free cycle is a site where you find yahoo groups of people who are giving away for 'free' unwanted and useable items. You can also ask the groups if anyone might be interested in giving away the items you are looking for, children's books is one of those things that people are usually trying to find new homes for.
Second hand book stores are great there are some to that have a really cozy set up so you sit and read a bit if you time to hang out. Amazon.com is another place to look for used books.
If you don't live near a library you could get a group of friends together and start a little toy & children's book lending library. I've lived in a community that had a toy lending library and my kids loved it. You can never have too many books in my opinion.
These are a few ideas if you have any other suggestions for find cheap/free books please comment.