DD is still too young to really understand but we tell her all the time that 'Mummy's got a bubba in her belly' and ask her if she wants to cuddle bubba, give bubba a kiss, etc.
Now she thinks *everybody* has a bubba in their belly (and it's gotten worse since we told her our cat is also pregnant, hey, if they cat has bubbas in there then so does EVERYBODY!)... it's so cute though.
We waited until 12 weeks to tell everybody this time around because we lost one at around 6 weeks when DD was three or four months old, so we didn't want to get everybody's hopes up.