I really like those little 30x handheld microscopes with built-in illuminator (flashlight bulb) powered by two AA cells. Radio Shack used to sell them for $10 or so. They are great for looking up close at all kinds of everyday things and objects found in nature. RS now has a fancier version that I haven't tried, claiming 60-100x. I have their old 100x model (plus the 30x) but I like the 30x better (wider field, more depth of focus, etc). I'm sure other places sell these things too.

I had a pocket knife by the time I was about 7 years old...a boyscout type that was probably a lot like that Victorinox folding butterknife.

But what I really remember as a cool gift was a magnifying glass.... I remember inspecting and frying many ant hills, started leaves on fire and even did some wood burning projects (like my initials burned on a board). I don't remember getting in trouble with it....not like the pellet gun I had later during boyhood...

As long as you're going to be around to work with him on it, an Estes rocket kit will be a real exciting thing for him to work with. He'll be inviting friends to come along as part of the recovery team running after the rocket as it parachutes into Mr McGuirks's garden... uh, oh, flashbacks... <img src="/images/graemlins/blush.gif" alt="" />

Compass, a Silva/ Brunton baseplate would be perfect. Another Option more pricey is a Geko 201 Garmin GPS. A few good technique books also.
I remember getting the Calvin Ruttstrum book "New Ways of the Wilderness" when I was about 8 and still have it and still read it from time to time. There are many more modern books that will fit the bill. Hope that gives you some ideas!

Estes rockets are a great idea. Building them then whatching them fly is way cool.