It's true, there's not a lot of good secondhand for older kids. Just looking at my own DS1's stuff, I can understand - I've stored all his old clothes that were in good shape, and for size 2 I have four bins... for size 3 there's only two small ones. There just wasn't as much that was still in good shape once he was done with them!
I have the most frugal system of all -- I had a second little boy, LOL!

Talk about stretching the clothing budget -- I had to buy very little for DS2 thanks to the stuff in the attic. So that's one thing to think about if you're thinking about more kids down the road - whatever you spend now is truly an investment in the future!
Because I'm looking for things to last, I do like to shop at places like Gymboree and the Gap rather than Target when I can, since these clothes seem to last longer and come cleaner in the wash. I don't ever pay full price, though -- I buy things like jeans in current and larger sizes when it's a good deal (last month Gymbo had their box sale and I got jeans in 8 Slim for only $6.99 -- slim sizes are hard to find!).
Gymboree also has their Gymbucks program - at certain times of year (like right now) you can buy $50 worth of stuff and get a $25-off-50 coupon to use later (for 2 weeks at the end of September, this time). They also have regular 20% off coupons, which can be used to earn Gymbucks (but not with Gymbucks). So normally I will go and shop the sale racks for mostly "seasonless" items (pants, jeans, long cotton shirts), use my coupon and spend just about $50 -- then I can go pick out another $50 from the sale rack the following month, and only spend $25.
I have a Gap credit card and I get free shipping and "rewards certificates" after spending a certain amount. I combine those with a coupon code online and grab awesome deals on those long john style jammies. About a month ago they had summer jammies on sale, and I bought a size up for my toddler (he'll wear them now and next year) -- four pairs for just about $30.
Land's End overstocks is also great, nice quality clothes and a lifetime guarantee. Great customer service. Again, you want to check in every couple of weeks, pay attention to their email coupons, and see what kind of deals you can come up with.
Do you have a Kohl's near you? Get on their mailing list! I actually get $10 off $10 coupons in the mail for them several times a year, and they have a large selection of kids' clothes -- combine it with one of their "3 for 10" t-shirt sales and you'd really make out! (Though I admit that lately I've been using my Kohl's coupons to replace some of my own baby-stained wardrobe!)
I know that packing away clothes doesn't work for every kid, but the nice thing about buying cheap, shopping "good" stores and leaving the tags on is that you can get your money back by selling what you don't wind up using - either at consignment stores or online (I belong to a Livejournal community that's good for this).
And thanks to packing away bigger sizes, my DS1 is pretty much set for school to start next month... and I can concentrate my budget on getting him some new sneakers. Of course he's aware of what's "cool" now and has his heart set on crazy light up sneakers for $55.... of course with a coupon I can probably get that down to about $43....
