DD doesn't talk yet, but I will always remember what my nephew said to me one time...
I asked him to be the ring bearer in my wedding. He asked what a ring bearer is. I said "you'll dress up very nice and walk down the aisle at church with a pillow. you'll carry my ring on your pillow". He thought about it long and hard then answered with "I'll carry your ring, but can I be a polar bear instead??" Get it, ring bear, polar bear. I laughed my butt off and actually considered getting him a white tux and calling him a polar bear.
ETA: Had to add this one from my now 11 y/o niece. It's a family classic that we still talk about. When she was a toddler, she mixed up the phrases "Excuse me" and "Good morning". So, when she meant to say excuse me, she would say good morning. We were all at my parents watching a movie one night and she was playing with a toy on the coffee table. My dad had his feet up on the table. When she tried to get through, this was their conversation:
Katy: Good morning, Papa.
Papa: Good morning, Katy. *pat on the back*
Katy: *looks at his feet* Good morning, Papa.
Papa: *laughs* Good morning, Katy.
Katy: *getting angry* Papa, I said Good morning.
Papa: I know, I said good morning back.
Katy: *starts shoving his feet out of the way* Good morning, good morning, good morning, etc, etc...
He finally figured it out (my dad's a little slow like that). He still tells her that story today, it cracked him up! She also confused the words chicken and kitchen at around the same age. That was fun to play with. As well as the word cheeseburger. She would say cheeseburberg.