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Seeing as the player can build the database on it's own; wouldn't it be possible to allow you to put the files on the Karma 'willy-nilly' and it builds the database itself?

Yes. The newly released Carbon does this, and based on posts over on "that other board" by Rio employees, this is likely to make it to the Karma at a future date.

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proprietary AAC format

Standard AAC format you mean, right?