You can only erase the partition that OS X is installed on you cannot erase the whole drive if you are booted off the Recovery partition. For you purposes, clearing the disk of your data before getting rid of the Mac that will be enough.
If you are selling or giving away this machine you really should be giving the new owner the original OS DVD. They will not be able to do anything with the machine without the OS DVD.
Since your 2007 came with install disks, I don't believe that the recovery option will do what you need it to do. You would need to be booted from another source such as your install disk in order to erase the drive. I would certainly suggest that you use the secure option (writing zeroes 3x) since you are giving it to a company for parts - you don't want anything on your hard drive to be recoverable.
Thank you for the response! I'm not selling it or giving it away to a friend -- just to a company for the parts. How do I just clear the disk -- which is the partition that OS X is installed on?
Just erase the partition that OS X is installed on and any other partitions you might have made. That will erase your personal data. In Disk Utility it will look something like
Of course the name will be different on your system
Message was edited by: Frank Caggiano