Hello Tammy,
First a quick background: I outed to my wife in August 2009, and started outing to family and friends early this year. We both had a talk to a child psychologist, to talk about how and when to tell our sons of 4 and 6 (now nearly 5 and 7).
She told us to do it together, as it is important (if you're still together with your partner) that you bring this news together. We decided to tell them the first day after school ended in June this year, because we would be moving to the UK in the summer, and it was not very important to also tell the school where they went up until then.
On that morning we sat on the couch and called them, saying please come, we have something important to say, and then I told them about not being happy as a boy, and preferring to do girl-things, and wearing girl-clothes and in fact that I would much rather be a girl, because being a boy made me very unhappy and sad, and that I would be much more happy as a girl (the child psy told us to use easy words, so the children would understand, child speak actually). Don't make it abstract, and when a child asks a question which seems to have a very broad answer, try to find out first what it is they mean exactly, and then answer only that specific question. Broad answers tend to cause more confusion.
They should also be allowed to be sad or angry, and know that it is ok to have these feelings. It is very important to help them express their feelings, so they can talk about it. I notice this is especially difficult for our youngest one.
You may sit together and choose a new name for you. Based on a tip from our child psy, we looked up a list of words meaning 'dad' in different languages, and picked 'aita'. Now they almost exclusively use this name for me, and by doing so still call me dad (which I will always be anyway), but for other people, it sounds more like a feminine name (you may have to pick a name in a language that is very uncommon where you live).
We were also told not to confront the children with your changing body, eg in the bathroom.
What is also important is that the school knows about it, especially the children's teachers, and that the children know it's ok to talk about it there, so they don't feel it's a secret. Melody already said to expect your children to tell others, and I agree, so it may be best to inform other people who are in contact with your children. The school is also very important to stop any teasing or bullying that may take place because they have a parent that is 'different'. We haven't had any negative experience here - luckily.
Very important is also to assure your children you will not leave them, that you will continue to love them, even though you will be going through changes.
And keep talking about it every once in a while. Ask them how they feel about it, ...
They will see you're much happier, they will feel they are still loved, and since they're still young, I guess they will be fine.
Our boys are doing just great. The first little talk lasted just a few minutes (with me still in man-modus). The oldest was surprised at first, expressed that he found it strange that I wanted to be a girl, but now he's fine, because he says that he sees I'm happy. The youngest had more problems with it, in the sense that he said for a long time that he did not like me changing, but when I ask him now, he says it's ok. One of the only questions they asked was whether I was going to have a new name, and I told them 'Marleen'. I still remember the youngest getting on my lap just after we told them, saying 'hello Marleen' with such a big innocent smile only children can give you ;-)
Changes were introduced in the course of the first month, after which I went to the child psy with them, which was actually the first time they really saw me completely as Marleen (with the youngest only calling his big brother, pointing at me and giggling 'look, daddy's got a handbag'...). They are so used to it now, I never get a comment, except recently the oldest started pointing out that I still look very much like a boy...a child's honesty is not always nice to hear ;-)
Expect to be embarassed from time to time, like having them call you daddy in a supermarket, or asking if you still have your ... in a train full of people. (the last actually happened to me, and I was very glad the question was in dutch, while we are living in the UK, and people probably did not understand it...)
I hope you find some useful information in this rather chaotic posting, and wish you good luck!
Marleen