I've learned simple arts and crafts projects can delight my children more than any fancy toys or videos. Color pencils are a superb tool for aspiring artists who have graduated from crayon use, but haven't started reading and writing yet. They are sturdy and allow lil ones to get used to the feeling of holding a pencil or pen for future handwriting, but will help create pretty pictures.
Simple: Derwent Studio Colored Pencils ($36 for 36) are an inexpensive alternative to the chunky set. The art supply staples will allow your tots to experiment with color without you worrying about them losing a pencil.
Swank: Twig Crayons ($150 for 60) were once featured in Vogue, but they are a bit pricey for art time unless your little one is a mini René Magritte. Despite their name, they are in fact, very fancy colored pencils.