Of course you could go at it "from the other side" by "simply" shrinking an iPad. It would be a challenge to make it as light-weight as the K3, but I really hope somebody will come close soon, the Kindle 3's weight (10 oz/300 grams) is fantastic.
Or for that matter they could make a six-inch iPhone, as it were. (iPhone's screen is 3.5 inches, the iPad's is 9.7.) Again the weight would be the issue. I've heard the metal is needed to dissipate the heat.
Many engineering challenges in that, I'm sure, but it's only a question of time. Particularly how much time. A year? Five?
By the way, I would advice makers of eReaders to concentrate on quality rather than quantity. For instance I saw a review of Pandigital's Novel reader, and it has a lot of features I will never need, but then the screen is not very responsive (and not multi-touch), and the reader app only has four levels of text size. Not great.
In fact, the "Novel" seems on the surface to be just what I'm wishing for here... except it just is not very good. Very slow, clumsy and unresponsive generally, poor screen, etc. So maybe I should have included "good" in the definitions, but in my world it pretty much goes without saying...