I think you have already solved the first problem.
Anyway, just for the record, you have to update your packages' indexes with
sudo apt-get update
then retry to perform the system upgrade.
About the 2nd question, I will replace my current jaunty installation with karmic as soon as it's released, and I will completely drop jaunty support and start to work only on karmic.
Some work has already been done, and packages are available on the repository (nc10-scripts, nc10-backlight), so yes, I think you can update to karmic safely.
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