Tell the truth. I tell my son the truth about everything (and he's nearly 4) and if he doesn't understand it, he usually just says "oh.. ok" and thats enough for him.

But if he asked me to clarify anything - i would do. I don't think they are too young to be told about the birds and the bees, just dumb it down a little and not make it so.. uh.. sexual.. LOL

Like, instead of saying that we had sex to make the baby, I'd say we had a special cuddle and that would probably be enough for him at the moment.