When ds1 was 3 and my sister was pg, he asked. I told him babies are supposed to come out through the mother's vagina, which is like a special kind of tube slide and then I took him to witness the birth...from the business end.

He's almost 16 now and has attended 3 births, plus he has hung around laboring women 3 other times without actually being in the room for delivery. We're planning to attend a VBAC in a few months.
Not that anyone asked, but I think it's great to expose kids quite early to the normal processes of birth. All but one of the births my older son experienced happened before ds2 was born (well, one of them was his birth, so technically he was there! LOL) so I am really excited for this next one so he can finally see a labor that isn't mismanaged straight into the OR.
Keep it simple, but be honest. GL!