I have wondered for a long time how exactly merfolk reproduce. I found two articles that, combined, set a pretty good idea of how this might work. There was one explanation that said that they are shapeshifters and become human to reproduce, but I think the following are a far better explanation:
http://www.radix.net/~koalatek/meranatomyhttp://www.radix.net/~koalatek/merreb I think the last paragraph in the second one is very funny. Happy reading.