The Color of Us by Karen Katz. This is a fantastic book to discuss differences based on skin colour. Its about a little girl who realizes, as she walks around town with her mother, her friends are many different scrumptious colours.
For the art project, I have the kids create large self-portraits on a 12" x 18" paper. I teach them about proportions and placement of eyes and nose. I have them sketch themselves lightly with pencil. Once they are ready to paint, I demonstrate how to create their skin tone. Here is an excellent tutorial on eHow.
With this activity, you can also teach a mini lesson on similes. My teaching partner had our students write their own poems and we pasted it on their portaits. I wish I could find a sample, but sadly I have filed it away. If you do make one up and don't mind sharing, send it along.
I also found a list of activities on Karen Katz's website. Have fun!