About rebuilding:
You can only transfer XP to a new system if it is a FULL version. If it was purchased as OEM or with a prebuilt system it will not be transferable and thus can't be activated.
He would still need a new Power Supply.
Windows 7 plus the Power Supply would be roughly $200 so we're up to $450 for a very basic rebuild.
Here's a quick idea of a good upgrade (prices will vary, look for online sales at NCIX, Tigerdirect and others. Factor in shipping. In USD.):
1) Windows 7 64bit Premium OEM: $104
2) i5-750 Intel CPU: $208
3) 1156 Motherboard - Gigabyte P55A-UD4P $175
4) PSU: Corsair TX750W $114 (SALE PRICE)
5) RAM/Memory: Corsair XMS3 CMX4GX3M2A1600C7 4GB DDR3 2X2GB DDR3-1600 CL 7-8-7-20 Core i5 Dual Channel Memory Kit: $120 (SALE PRICE)
6) Hard Drive: Western Digital Caviar Black 640GB: $66
7) Graphics Card (see comments): $60 or more
Total: $847
1. Windows 7: If you need to get a new OS then Windows 7 is it. If so, you'll definitely want the 64bit version. In the recent past 64-bit was an issue. Not now. In fact, you'd need a special reason NOT to get it. 32-bit limits the RAM you can use. The maximum is about 3GB, less if you have a 1GB video card. OEM means you pay a lot less. You can't move it to another computer, but why pay more than double for that option?
2. CPU: You can easily get a solid dual-core CPU for about $80. If you know you'll never want to play games or do any heavy processing that's worth considering.
3. Motherboard: The socket is 1156. The socket plus CPU combo for 1156 is cheaper and consumes much less power than an equivalent 1366. The 2x8 or 1x16 PCIe lanes can support up to TWO HD5870's before maxing out PCIe bandwidth. Most people should get an 1156 motherboard and CPU.
4. PSU: Very important. Don't skimp on a cheap one; if so you may get many issues (the least is fan noise, the worst is a fire). Corsair is a good quality version. Look for sales.
5. RAM: 4GB is optimal. You're unlikely to need 8GB which mainly just adds heat. Don't get less.
6. Hard drive: WD is a good name now. I do recommend a backup drive and use Acronis True Image to make a Windows IMAGE. Backup drive recommended is a WD 1TB Green EARS. I will be recommending a Solid State Drive in about two years for a main drive. Price and quality are still holding them back.
7. Graphics card: Unless you are into gaming I'd recommend something like the HD4550. If in doubt at least the cards only about $60. If you want something more then you should get a DX11 version for future-proofing. And if you get that you should WAIT for NVidia's new cards. After a month or more, the ATI cards will drop too but for various reasons I'm wanting to go with NVidia now.
Other:
1. DVD burner not included (If not an issue, hold off for BluRay burners to drop in price). Otherwise, $25 get's you a nice burner. Buy one with a firmware update less than a year old (check it's web page). Firmware updates are for disc compatibility otherwise you get burn errors (unfortunately many great DVD burners need to be replaced ONLY because of a lack of new firmware. A situation the manufacturers have no intention of changing and something which could easily be fixed by moving the firmware from the DVD chip into a simple Microsoft Update. I digress... )
2. Look for sales.
3. Read reviews for each part.
4. Buy for the next five years (except the graphics card).
5. Don't get a cheap quality PSU or Motherboard.
I hope you found this useful. You can buy a cheap $500 prebuilt system from many stores. They have cheap motherboards and if they even have a graphics card expansion slot you'd most likely need to replace the Power Supply to upgrade it.
You can build a quality system for as low as $600. For the reasons above it's worth it to spend a little more. A more efficient PSU and avoiding bad parts will quickly close the gap in price while giving better performance.
Cheers.
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