first of all I would recommend simply using the factory recovery partition on the computer to restore it to when it was first purchased. this will format the drive so your personal data will not be accessible. If you have sensitive data on the drive and need to make sure the data cannot be recovered by computer sleuths then you will want to look into Darik's Boot And Nuke disk
While I always encourage the use of linux (Even my daughter is named Linux) since you are giving the computer away if it already has a windows xp license you might as well leave it on there or at least dual boot with linux.
I have an old windows xp pc (about 5 years old). i want to give it away but first I want to completely wipe the hard drive and then install linux on it so it works for the new owner.