Strange thing is, back in the supposedly puritanical 50's, no one thought much of it. I inherited from my mom slides of me running around naked at the beach at age two, and color prints of my bare butt at age three riding a tricycle naked (my mom made me do that, because it was "cute"). No flak from the processors.
My main objection is that they demanded destruction of the slide after acknowledging that there was no ill intent in its creation. So what if there are some "naughty bits"? These days, adult's "naughty bits" can hardly be avoided when going to movies, because nudity is now OK, and porn is all over the internet, yet the innocent nudity of a small child in a private family photo is not acceptable. It's a picture of a little child, it's a private family photo by you, the child's parent, and it's your property.