Dr. Ruth Westheimer (sp?) has a book called Who Am I? Where Did I Come From? It's appropriate for even very young children, and it explains very matter of factly the process of life. Believe it or not, it's even a pop-up picture book (but not of the reproductive organs
but rather a baby in the womb). It uses appropriate words (penis and vagina) and ends by saying that it's important to not grow up too fast.
I really like this book and already read it to my two year old. It is, after all, as natural as identifying a hand or a foot.