First recommendation is definitely to alter the formfactor of the next Karma. That's not to say make it the same as the iPod, but refine what was started with the first version. Toss the scroll wheel. These things are too promlematic on every device they're used in. Let's try to lessen the number of intricate mechanical UI components.

I don't agree with that I like the square form factor better. It fits in my pocket and my hand better.

Keep the shape dock-friendly. In fact, make it more 3rd-party accessory friendly by losing the irregular contour. Definitely keep a docking connector on the bottom. Make sure it supports the following if it doesn't already: power, remote-control (duplicating all device buttons and more if possible), USB, ethernet, audio output - and that through the USB lines (likely) information that is relevant to the playlist(s) and playing tracks can easily be communicated. Third-party friendliness goes a long way to mass-market adoption.

I don't think the form factor has anything to do with 3rd party support. You get 3rd party accessories by selling more units. It doesn't matter how easy or hard it is if the companies will figure out how to make the accessories if the demand is there. The only mp3 player I have seen 3rd party stuff for is the ipod.

An obvious one is not to over nor under-price the product. If it's as good as the iPod (as an example), then people will expct to pay a similar price. Too sharp a discount and it brings up questions of quality.

Not necessarily, Apple products are over priced so I don't think people will think your product is crap just because it is cheaper than something from Apple.