The Sony PRS-T1 supports two audio formats, those being AAC and MP3. There's a 3.5mm audio-out jack for headphones. I owned one, and the sound was fantastic! It's not just a thrown-in feature, it really does have a high-quality sound, akin to Sony MP3 players (same DSP maybe?). You should still be able to find a model easily enough....and it is a very good e-reader to boot!
Oh, and your friend is wrong. E-readers of even previous generations (to say nothing of current gen) have ample processing power for decoding compressed audio (MP3, AAC, etc.).