If I remember correctly, the Karma does use a smaller drive that is not yet available in 40gb size, but the Karma 2 (which has been shown off at conventions and I know I've seen pictures, well, somewhere...) has been resized to be able to fir a 40gb drive - though the specs haven't been released (to my knowledge)
Either way, my personal recommendation would be to steer clear of the iRiver. I bought one at first, kept it for a few weeks, eventually got tired of how godforsakenly slow it was, and returned it for a Karma.
It has some very nice features (Optical and Analog in/out, comes with a case and a wired remote, etc)....but the machine itself wasn't up to par in my standards in that it took a long time to boot up, and a long time between tracks. If you're like me and skip tracks until one you feel like listening to comes on....not for you.