Like you I am honest in a simplified way. DD (5)asks things like will I get long hair on my bottom like you when I am big? I said yes! Will I have big boobs with milk in when I'm a grown up? Yes if you have a baby. However, I chickened out when she saw some blood down the toilet and told her I'd cut my leg!
I read ds1 5 and dd 3 Babette Cole's book Mummy Laid an Egg when I was pregnant with ds2. They found it hilarious and it answered most of their questions. I was stumped yesterday when dd asked what her clitoris was and why it tickled though (see other thread)
Babette Cole is great. I also bought 'It's so amazing!' by Robbie Harris for my 8 year old and kept checking i with her while she was reading it. It's a really, really good book. It even has a page that deals very tastefully with sexual abuse and how to deal with it. I know there's a book called 'It's not the stork!' in the same series for younger children but I haven't looked at that one.
I agree with Taffy that I just try and answer questions in a simple way that my LOs can understand. It's hard to do the 'right' answers though on the spur of the moment. I do like using books and talking about the books though! Things are sometimes easier to explain with good, cartoony pictures to illustrate!