First, Linux. Windows XP era versions of Windows are almost useless now, so find a distro you like and install it. I personally would go for Ubuntu Server, either 14.04LTS or 15.04.
With 8GB of DDR2, you could easily host a web server. You could expand that capacity with something like CloudFlare which will take some load off your server. You could also host game servers, although that will depend a lot on your internet speed at home. You could make it into a small NAS, FreeNAS probably won't run with 8GB of RAM but you could either add RAM (your CPU should be fine) or you could use a lighter solution. I recommend Open Media Vault, I have heard good things about it and it is Debian based so should have very widespread compatibility. I think @Dexter_Kane uses OMV for a NAS he has, so you might ask him if he likes it or not.
Another super cool thing you could do with this is set up Proxmox. This is personally what I would do, because it allows you to experiment with all sorts of things. Your limiting factor with this machine is going to be RAM, if you could bump it up to 12GB or more that would help a lot with virtual machines, but even with 8 you should be able to fiddle around. You can run small Ubuntu servers (just to tinker with) using OpenVZ with almost no CPU and 512mb or less of RAM. Watch Wendell's video for setting up Proxmox, but post here if you have problems. I have been running Proxmox since 2012, and I love it, so I'm certainly up for answering questions. To give you an idea of stability with a Proxmox server:
It's only been up for 75 days because I had to restart it a while back to clean the radiator. It's an FX-6300 machine with 24GB of RAM and a WD Blue hard drive as it's main drive, but 2 spare 200GB drives in ZFS RAID 1 to do all my important backups on. I run my DNS server, web server, game servers, test Linux boxes, and more on this. I use a pfSense router and a cheap managed switch to be able to run machines on various VLANs, so I can set up elaborate test networks (I've done some mimicking the Windows-based network at my school before, to test if an idea would play nice with it, that's a handy thing to be able to do) and the rest of my network doesn't feel anything.
The reason it's sitting at nearly 75% CPU usage right now is because I have a VM with Folding@Home on it. When I'm not actively doing things with my servers, the machine sits between 5 and 10% CPU usage, so I donate a lot of cycles to Folding@Home.
I run all sorts of VMs on this thing, I love it to death.
Not all are running regularly but that's the cool thing, you can jump back and forth between lots of different little "tinkering" machines, without the pain in the butt of having a bunch of physical servers.
The only issue I could see with an XP era server is hard drives. If it supports SATA, you should be fine for just casual screwing around (don't use this in some super important data center, just don't :P) but if you're only on IDE you will likely be limited by space as well as speed. Since you're running a ton of computers off the same hard drive, hard disk speed is a bit of an issue with VM servers. I haven't had many issues from mine, but my drive is a SATA III mechanical drive, so your mileage may vary with older drives/older boards.
Again, I'm happy to answer questions, I've been running this setup for years so I've learned quite a bit about it.
TLDR - USE PROXMOX AND DO VIRTUAL MACHINES
Edit: Before anyone asks, no, those are not public VMs. Those DNS names are resolvable on my network only. I checked those photos before I posted them and no important info is given away.
