I started checking the local thrift store earlier this year for the same reason, finding decent P&S with a fast prime to teach my kids photography. So far I've picked up:

Olympus XA 35mm f2.8 for $4.00 (I believe this is the worlds smallest "manual focus" rangefinder. This one I claimed as "my" pocket camera)
Olympus Stylus Epic DLX 35mm f2.8 for $3.00
Konica Big Mini BM-201 35mm f3.5 for $4.00 with leather case. My kids like this one it's easy to hold
Plus two late model Pentax IQzooms, the last models made for $4.00 each

There are some great deals to be had if you check often. Also regarding 127 film, I believe Rollei still makes Retro 80 in 127 size. I last saw it on Freestyle photographic supply's website.