My son was also receiving some mis-information from older kids and kids with older siblings, so we had this talk a little earlier than I would have liked (summer before second grade). I started by getting him a cute book I remembered from when I was a kid (they have it at Barnes & Noble).
"Where Did I Come From?: A Guide for Children and Parents"
by Peter Mayle, Arthur Robbins (Illustrator), Paul Walter (Illustrator)
He read the book...giggled..and when I explained that it was kid of funny when you think about a lot of it. I asked him what he thought was so funny. He said, "It just dawned on me that you and dad HAD to do that TWO TIMES!!!" (we have two kids)
After we talked about it, I explained that many kids do have the wrong ideas so 1)This isn't a topic you want to discuss with your friends because you may not get the right information, 2) It isn't a topic for you to share because I told him we felt "he" was mature enough to handle it and keep it to himself...but many parents do not feel children his age should have that information, so it wasn't our son's job to give them that infomation, 3) he is welcome to ask us anything at all, and we will try to give him as much information as possible.
Since then he has been tested...my friend's son begged him to explain what it was at a park one day (my friend overheard the conversation and was quite impressed that her son badgered mine for over an hour off and on about it, and my son refused to tell him). The same friend of my son's, months later, went on to tell my son he "knew what sex was, but that his mom (my friend) was old, and had kind of forgotten what it was," and asked my son to give him more information so that he could tell his mom "privately so she wouldn't be embarrassed about forgetting." He said he knew what it was, but wanted to get the details right so not to confuse his mom. My son didn't fall for it, but man have we laughed over that one.
Mind you, two years after our big talk, he had some new questions: how do boys have sex with each other (he was hearing boys pee in each other's mouths), and how do girls have sex with each other? I felt a bit squeamish about the topics, but I felt it was more important for him to have a comfort in talking to us, and to know the true facts. It has since led into questions of a more personal nature which I have responded that "yes we (dad and I) do have sex more than once a year, but that it is a private matter on how often, etc. and I didn't feel it was germane to know those details about anyone.
I think you have to be candid and honest. A good book you feel comfortable with can start the topic. We gave him the big picture, told him about love and responsibility, also talked about kids doing things before they are ready and even kids having kids and how it alters your life so much that it may keep you from doing and being who you want to be because of responsibility. In fact, we spent a lot of the talk on kids having sex and how that impacts the rest of your life. We then told him to ask us anything, anytime and we would do our best to give him the information.