They get Linux'd and reassigned. You can never have enough machines standing at the ready. I have on Windows 98 machine, just in case, but every body else gets some lightweight distro. I wouldn't be caught dead without a spare PC, and they use less energy anyway for more mundane tasks.

Depending on how functional they are, there are local community groups what would grab this stuff, just to have something! I occasionally setup old stuff for them and the extended family.
I dispose of plenty of old stock from work every 6 months, though new rules means we have to use the approved recyclers rather than try and directly assist poor families/communities.
Load up a light-weight flavour of a Linux distro and they are pretty much set.
Unless they are too familiar with XP and/or believe that a 4+ year old rig will let them do what they can do with a new $2500 machine, people are happy with what they can get when the budget limit is $0 to $50.
Used to keep a few old machines around for when I wanted to run something of that era, but virtualisation has cut down the need quite a bit.

Yep, load a Linux distro on it. As well, turn it into a folding rig.
DeathKitten: there are a number of disk wiping utilities that can be used to clear your hard drive. Basically they write 1s to the entire drive (including the MBR), then do another pass where they wire zeroes, then a third pass where they write static (random data). This is secure enough for the average user, as anyone you're going to be selling or donating your drive to will not have access to anything that could possibly recover data after that's been done to the drive.

If the data *needs* to be dead, then no, theres no way to be truly sure that it cannot be recovered so long as those platters are intact. So crack the drive, throw a degaussing coil over them, smash them, burn them, and lock away the ashes, (Actual procedure used by insane professor at the local uni).
But, unless you have state secrets, plans to a nuclear weapon, or other ultra-sensitive data, its not likely that anyone is going to bother recovering. When you hear about data recovered from ebay drives, then the drive was typically not formatted at all - or perhaps it was quick formatted which doesn't actually destroy any data, which means the data can be recovered with the right software. Using a proper erase program will keep the data from being recovered without sending the drive to a data recovery lab which will use far more sensitive readers to try to read what used to be on the drive.

Most average people are more than fine with using using a DoD level file shredding utility (erases and overwrites the entire drive, multiple times). Only government agencies or corporations really need to worry about someone trying to recover data off of a drive that has been erased like that. Not to mention, it is generally impossible to get any kind of complete or useful data off of a drive that has been DoD "shredded".