I would have gone with an iTouch.. pretty much an iphone without the phone (wifi included).

Since that's probably not an option now, there are some interesting android devices on the horizon, including one by Creative that looks promising:

http://www.zii.com/Developer/Landing.aspx

Do a google search for "MID" as in "mobile internet device". Most of the ones I've seen are in the ~$400 range, but as they take off, they should get cheaper. Nvidia is promising a $99 MID based on its Tegra chip. They are also promising a $299 ION-based "mini-notebook" (haven't seen one so I can't tell you how big/small it is, or if it's already out), but it apparently runs windows so I dunno if that's your thing.

If there isn't anything this moment in your price range, I'm sure if you wait a bit, there will be.