Will a system image work to restore win 7 that was an upgrade from xp?

I have a computer that is about 5-6 years old. It is a Tosh Satellite, and it came with XP. About 3 years ago, I had a guy upgrade the os to win 7 ultimate. I knew at the time that doing that was difficult, but this guy is talented and I knew that the computer only needed to work for another year or two before I bought a new one. lol

Now I have two new computers, one for home and one for work. Both have w7 home on them. The old computer is still working great, so I want to give it to a friend who has no computer and can't afford one. But I want to remove my data. There isn't really much on it that is sensitive, but I would still like to reformat it at least. The problem is that I do not have system recovery disks for the win 7. So I have three options, or more if someone can suggest something:
1) Use the recovery disks that came with the computer and restore it to factory, and xp.

2) Create a recovery image and try to reformat the disk with that, but my concerns are that this was a win7 upgrade from xp. Would that matter?

3)Can I create recovery disks or a recovery image on my new computer that has win 7 home, and format the old computer HD with them?

Any advice would be much appreciated.

Thanks for the welcome and the advice!

So I just need to create the system image, put it on dvd(s) turn the computer off, then turn it back on and hold down c or F10? I have read that I should hold down one or the other.

Is this an easy thing to do? I have loaded pretty simple linux os on to virtul pcs, but I am not smart enough to load windows 7 on to a HD. lol Do I need help for this or will recovering be easier? I think I used a recovery disk on that computer once, but I had to have help fixing an issue with that computer first. I can't remember exactly what needed to be changed.

I have an external HD that I can save it to. I will read through your links.

Thanks a bunch!