We are big fans of homemade water rockets. You can construct them out of plastic soda bottles easily. If you want over-the-top multi-staged water rockets, see this earlier post on ultimate water rockets.
Steve Lodefink just posted a very fine ode to making a set of water rockets for a kid's birthday party. He gives some quick guidelines and a sketch of what he did, which as usual, he did with an artful flair.