For my son's birthday this year, we decided to get him a butterfly kit. They sell them at most major toy stores and online. Here is the one we did: http://www.shop-insectlore.com/Butterflies/Butterfly+Garden+Shipped+with+Live+Caterpillars.axd
Now don't get yourself all excited thinking there are live bugs in the kit. The box acutally comes with just the butterfly house and a certificate that you take online to order the actual caterpillars (I suggest ordering the bugs before you give the kit to your child because even though it only took a few days to get them in the mail, boy was that a long few days for my kids to wait!) Once you get your caterpillars, you get to watch them grow and grow and grow. Its pretty amazing how quickly they get soo big!
After that they go into their cocoons, and then after a little more waiting...... YAY BUTTERFLYS!! We were glued to the butterfly house for weeks. The kids loved that they got to feed the butterflys flowers and sugar water everyday. They never missed a day... And if they had it their way, we would have fed them every hour.
The hardest part of the whole experience was convincing the kids that we needed to let the butterflys go. We watched them a week, and they finally agreed it was time. We found a nice flowery spot and said goodbye.
This little guy tried to hitch a ride back in the house on my husband's hand.