After getting the iPhone, my wife and I had some toys that went into obselescence. One of them was my old Palm Lifedrive. Although the touchscreen was getting a little worn out, it still has a lot of life in it. It has a decent battery life, a bright 480X320 screen just like the iPhone, wifi, bluetooth, and a 4GB hard drive.
I ran across an interesting program - TCPMP. It has since been discontinued, but here's a link to the Palm version: TCPMP
I loaded up the Palm with videos for my son, and bought a cheap $4 set of headphones for him. I even have the car charger, so he can watch videos on long car rides.
The only downside was that it can't handle some files with high bitrates (above about 1000k/s). I use Avidemux to transcode the files and resize them to the Palm's native 480X320 resolution.