T.A.
I would be as honest as possible with her, and use correct terms. I'd tell her that the baby comes down the birth canal from mommy's uterus which is located under your stomach.
Depending on how much she can handle I would tell her that it might hurt but that the doctor will take good care of you, and be sure to read her books about babies and what happens (mercer mayer's the new baby was our favorite).
With our second, she was breech so I told our almost three year old that the baby's head was up instead of down and that they have to cut my tummy to get her out. She was a big help and very caring and is still interested in seeing my scar. She also came to all my doctor's appointments which I think helped it seem less scary. Honesty goes a long way, even with three year olds!
She was very excited to meet her new sister and very proud of her big sister shirt and necklace and her new baby doll she got "from the baby" too! Good luck, two is so fun!