You will want to delete the original C: partition, as long as no important data remains on the hard drive, and create a new C: partition using all space. This is an option in the blue installation menu.
8GB hard drive is very tight for a Windows XP install as for if you have 512MB RAM, 1.5GB of the hard drive is consumed in swap space leaving 6.5GB free for the OS to reside. Windows XP Pro SP2 installs clean consuming around 3GB of hard drive the last time I installed it to a small hard drive which was 6.4GB and system with 256MB RAM. I ran into issues quickly when I had very little space left to take the many security updates and software.
If you can get a 20GB hard drive or larger to use on this computer you would get better performance as well as not paint yourself into a corner with running out of space to install programs and personal data. Larger drives perform better since they do not have to sweep large areas of the drive to acquire the data to read/write as well as some of them are higher RPMs such as an upgrade from 5400 RPM drive to 7200 RPM drive etc. Performance on this 8Gb drive will be very laggy at boot up and running programs even if you have lots of RAM because the OS will have to load off of at least 33% of the space.
