I have a 2.5" external case, but no drive to put in it. It's much bulkier than this ARCDrive.
As long as money is not an issue, I think I'd pass on the iPod and go for the
Archos AV320. Plays MP3 files
and MPEG4 video files on a 3.8" LCD. Doubles as hard disk storage and supports attachments for vid-capture, camera, radio, etc. The local Fry's has them in stock at list.
Still too expensive for me, though; could get a laptop for not much more. And portable DVD players (for DVD-R) are almost in the must-have price range.