Your bootloader is fine and can use any SDHC cards up to 32Mb. You should use that instead of the internal memory.
When the SD or SDHC card is inserted, your GO 720 won't even look in the internal memory. It will just boot off the card, so you can't use both the card and internal memory simultaneously - it's either one or the other.
You won't need to format or alter your internal memory. Just leave that as is and setup everything on your 4GB+ card.