I don't understand why you would want something smaller than a Muvo or one of the flash Rio players. Rio had something about the size of the iPod Shuffle that had a display and went on a lanyard, too, but I think they stopped selling it about a month ago. Had some polymer battery thingy.
After a point, smaller is not more convenient. If they want something better than a Muvo, they need to get rid of the cord.
Oakley has the ridiculously expensive sunglasses with a built-in MP3 player, and someone else had headphones with a built-in MP3 player, but both of them have a pretty sad amount of memory.
I'd like to see a watch MP3 player that uses bluetooth headphones. I guess then you have the issue of the battery life of your watch and your headphones, but it'd be nice to have the controls/display on your wrist. Regardless, it would be nice to have your cell phone, MP3 player and headphones working together wirelessly.