UPDATE: There is an excellent article on the topic of data destruction posted on the New York Times technology page: http://www.nytimes.com/2005/11/03/technology/circuits/03basics.html?ex=1288674000&en=52d20fde5a31403f&ei=5088&partner=rssnyt&emc=rss
Before selling, donating, or disposing of an old computer you need to first destroy your old data files. Using a variety of online resources, including PC World, SmartComputing, and CNET, I have located a highly rated piece of freeware called Eraser 5.7 by Heidi Computer Ltd.
This software allows Windows users to completely delete AND overwrite sensitive data on their computer's hard drive.
The average computer user assumes that emptying the recycle bin eliminates data forever, but those with sinister intentions know how to recover the deleted files. According to data cited in a ZDNet article, 7 out of 10 hard drives purchased on eBay still had readable data on them!
The physical location of the data on the hard drive must be overwritten and rewritten SEVERAL TIMES with a random pattern of zeroes and ones for it to be erased and unrecoverable.
You may download the free software from the Eraser website: http://www.heidi.ie/eraser
Read CNET's review of Eraser here.
If your old computer no longer works, the data on the hard drive is still vulnerable! You can physically destroy the hard drive or use a demagnetizer (known as "degaussing").