What's the price of a USB hard drive versus a standalone 5 or 7 inch DVD/MP3 player? Prices here in the UK make your idea a non starter if you don't already own the drive.
So, not sure your proposed solution makes technical or financial sense given the price of a 7inch DVD unit these days. Will the IPAQ even support USB 2 to give you enough throughput for video playback?
Regards
Rob