I would suggest that you consider the new Sony line of readers - they have great reviews, and I personally am very impressed by the 12 dictionaries that are installed in the devices. The least expensive is the PRS-350 (5 inch screen), and it's on sale this week for $30 off at Sony style. The PRS-650 has a 6 inch screen (just like your K3), and the PRS-950 has a 7 inch screen and wi-fi / 3G.
I don't know how annotation of library books works on any device, so I can't help you there.
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