You don't. If this is a drive you bought and had put in the system, or the system is out of warranty (which seems likely given its age), then don't worry about it. Just have some cathartic fun, smash it with a hammer or something. Of course you will lose any and all warranty claims you may have with the drive if you do that.
And your friend's fears are unfounded. I have a test drive at work that I use for running diagnostics off of on systems, and it also has my known good OS for testing. You're not going to hurt a thing doing what you're doing, though it's really not a good long term solution for a number of reasons.
But if the drive was recently purchased and is under some kind of manufacturer's warranty then you have to decide which is more important. Saving some money exercising your warranty rights, or ensuring that there's absolutely no chance of anyone getting the info on that drive.
That all being said, I can tell you that despite the horror stories picked up by the media, 99.999999999% of people won't give two craps what's on your drive. I work on customer systems all day, and honestly it gets to the point where you really don't care. It's just another system. Unless I see something like kiddie porn right on the desktop, which I'd be obligated to report, I'm generally not going to go rifling through people's stuff. And you have to figure yours will probably be one of a couple hundred bad drives that come in every day. Even if someone were inclined to go through them, the odds of them picking your drive are probably pretty small.
So, the choice is yours on what you want to do, but you can safely ignore your friend on this.
I tried to submit this question to MacFixit, but the "Submit" button never worked:
The internal hard drive in my MacBook died. It was verified dead by a nice "genius" who also didn't put it back when he was done to make it easier for me to return it under warranty. That set me thinking. If I have to return it in order to get a replacement, how do I erase it, or at least get rid of sensitive information on it? I personally may not be able to retrieve such information from a dead drive, but I have heard horror stories. I worry about physically destroying it before I send it. They may not honor the warranty if I do that. What do I do?
Former internal drive: Hitachi 5K320-320 Model HTS543232L9A300
I also have a SuperDuper! backup on a firewire external Maxtor, which is what I'm running off right now to the horror of a friend of mine who cautions that I might destroy it too and not have any backup to transfer to a new drive. What? Destroy? I wasn't doing anything unusual when the drive died. Besides, I also have a another external drive (but USB) with a somewhat older CCC backup. The BootCamp partition with Windows on it is a different story...