What a nice idea! If you are an established charitable project, you can send a press release to the local paper mentioning that you are looking for yarn donations. Also, check out freecycle.org. It's a newsgroup with locations across the country that posts items for free to anyone willing to come pick them up. I belong to my freecycle group and I've given away and received lots of perfectly good items, including some craft items I've used for my Girl Scout Troop. Also, garage sales are great places to get yarn. And, finally, you can visit the local craft stores and ask them for donations in kind. They may be happy to get rid of some yarn that is not selling well for a good cause.
Good luck!
