We just returned a boxer (almost 10 months old) to his former owner today for the same issue - we'd taken him on trial. He lunged at a toddler Wednesday (thank God I'm pretty strong and held onto him and we were across the street from her), snarling, growling, rearing up on his hind legs, twirling on the leash, and hackles raiesed, barking furiously. He was definitely in the red zone! The child's father was not pleased, as I can perfectly understand. The boxer had done the same to every dog - especially small dogs, we'd passed during our walks. I figured I could get him to eventually calm down regarding the dogs, but when he did it to a young child (around 18 mo. - 2 years old), that was the last straw. I live in a neighborhood FULL of children and dogs, and I couldn't risk the possibility of this dog getting away from me and attacking a child or small dog. OMG, I couldn't live with myself if that happened - never mind that a lawsuit would clean us out financially, and deservedly so!
Fortunately, I saw that the OP's dog is small. At least a dog this size is controllable. The boxer we had was nearly 60 pounds of unsocialized pure muscle - too much for me to deal with at my size. The previous owner was less than honest with me about this dog, to say the least.
I think the advice to let the dog observe from a distance is good, but the dog eventually needs to be around calm older children (one at a time), then work up to younger, and more children at a time.