As it turns out, the video format isn't an issue for me -- I've already converted all my video to h264 and loaded it in iTunes, so all my video is already iPad compatible. It was a bit of a pain when I switched from my old format, but hasn't been an issue since. I downsampled some of my videos to save space (and because I couldn't tell the difference on the iPad or on my 720p TV).
I definitely wouldn't buy any video from the iTunes store unless I really didn't care about being able to use it in the future or on different devices (I think I bought a handful of TV episodes when I didn't want to wait for the DVD to come from Netflix). But this really isn't an iPad problem -- it's a MPAA problem, and anybody else that sold movies or TV shows would have the same DRM bullshit as Apple.
The other form factors (laptop/netbook and iPod touch) are completely out for the car -- a laptop/netbook can't be easily mounted in the backseat, and an iPod touch is way too small for two kids to watch together. Before the iPad came out, I had looked for a replacement for the DVD player, and found very few that would play video from SD cards, and none that had internal storage of any kind. So the options were either a DVD player with marginal support for playing video from an SD card, or a phone-sized device that was too small to bother with. I was leaning towards just not replacing the DVD player because those options really weren't appealing to me.
And for just a video player, I wasn't sold on an iPad either. It was a couple hundred bucks more than the DVD players. But when I realized it could replace our (admittedly aging and underused) laptop, then it made sense to me.
You say it's "slow", and I really don't know what you're talking about. It does all the tasks I need doing without any obvious slowness. I haven't compiled anything on it or transcoded any video, but then that not what it's for.
-Esme