Well I have experienced some of this with two of my three adopted children. My oldest is 9 has three older sibs who live with her birth grand parents(who adopted them). We see them for visits, but they also live in our small farm community so we run into them while out shopping alot too. I guess it was easier to work out in my mind and pass along to my daughter how her older sibs were already where they would stay (adopted) when she was born, but they were unable to care for another baby so she became ours. We do not always think the other kids are in the best situation but I guess since they were there when we came into the picture I did not feel intitled to question it alot.
My middle child who is 4 was the first birth child for her b-mom. Now b-mom is less than a month away from delivering a new baby. We have told our child that this is her sib, but we will not be the baby's parents(b-mom does not plan to relinqish). I however feel very upset at times about this situation & am afraid it shows through to my daughter. The b-mom is still trapped in the same sort of bad situations that led her to place my daughter. I have been suportive of her hoping that since she wants to parent she will succeed at it. Problem is I am not so sure & I worry that my daughter's birth sib will be caught in a bad situation and someday our daughter will be angry at us for not being able to bring her brother into our family (we would if asked). Thing is b-mom's family do not feel she can handle it either and are already making plans to have this one or that one temporary care for the new baby as needed. That makes me wonder if I have a double wammy to explain to my daughter! First they could not care for you so we adopted you, but then perhaps they later regretted their choice(of us or adoption in general)so much that they instead decided to bounce a new child around in the same bad situation.
The main thing I guess is that we are honest about relationships and we try to keep our own personal fears about things we can't alter (like a birth sib and where they live) to our own adult converations. I encourage my oldest to write to or call her birth sibs when she is thinking about things and that seems to saitisfy her. I have also encouraged my middle child to help us offer support to her b-mom for the new sibling. Recently we shopped for items she will need and mailed them with pictures of our daughter & her b-mom from a recent visit.
I think Mr. Diamonds answers we great, but very general. Take your own situation and make variations on that great advice so it can best work for you.
Good Luck!

Peanut, Wow! You do have a complicated situation. I appreciate such a complete response. All you can do is tell the truth I think, and in the end it will speak for itself. We try and try to help these young or 'crummy' moms, but they don't always understand how to take the help and move forward. Good luck with the new siblings. Let me know how it progresses and how you handle it. Michelle