Surely mpeg4 avi is a fairly compatible format, and if you have a GP2x, why would you use any other portable device for video on the go. Pocket encoder takes most formats too. I would just keep two versions of videos, one for pc full size, and one for gp2x/other qvga. Unless there are other internet things coming into account, in which case transcoding isn't that lossy.
It's certainly not deficient, ever tried getting video on a Nokia N70, or was it E70, anyway it was terribly finicky, and only did a max of 15fps at the end of the day. It would be handier though if it did support more formats, but not a functional requirement. I find the movie player quite stable, something funny though about channel switching on the audio - maybe I'm trying to encode 5.1 as stereo though or something stupid like that...
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The only problem with that is when people start talking to you and want to know what that psp like thing is, really annoying :-)
Not so often my end, I think most people just think it is a PSP. I wonder am I the only one in Ireland with one... Probably not.