The K3 has the new screen and 4 GB of memory. This is the DX Grpahite video I referenced in my earlier post. The K3 6 inch would be smaller but the screen is the same and the page turn rate is the same. You can pick one up for $189 with 3G and Wi Fi or a Wi Fi version for $139.
I read posts from people who used 32 GB cards on their K1s. Most of them ended up having problems with indexing taking forever and draining the battery. Kindle Boards has an SD card topic that goes back to the K1 and discussion on what type of cards people used and what problems they had.
It was rumored that Amazon dropped the SD card option because CS had to help a ton of folks through problems caused by indexing.
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