My son would like a fly setup for Christmas, he's fished a couple of years with an inexpensive spincast outfit but now he wants to try fly fishing, like his Dad.He's nine and I can't spend a lot. Gotta keep the house warm!
I am planning to build a 7.5' 3 or 4 wt for my nephew. You can get get a kit to build one like it for quite a bit less than $100, and build it yourself, or trade for someone else to build it.
I would also recommend looking into the 2-piece Pfleuger Purist 7.5' 4 wt. It is a really nice rod that you can pick up for as low as $30, if you search the web with Google. An inexpensive reel, some of your spare backing and a fly line, and you've got a setup. Can even pick up fly rod tubs at a reasonable price. Whole package < $100 if you look for it.
I fish with a nice 4-piece, 5 wt rod I built, and bought a Pfleuger Supreme rod for backup, For small streams, I bought the purist 4 wt mentioned above, and this has also been the rod my wife learned to flyfish on. Lightweight and easy for her to handle.
I'm with afishman, kids are rough on equipment. I bought my son a scientific anglers setup from walmart when they were having their sales in the sporting goods section for 20$ and it seems to be a great set up for him. He loves it, its not "boring fishing" he is constantly doing something. Plus in spring and summer I take him to brush hollow and he cant keep the gills off his rod.