Short version: No, it's not the Dell CD, it's that he needs a license key.
Long version: Dell's CDs automatically install a version with a Dell license key - *not* the one on the case sticker, but that doesn't matter, because you have the legit one on the case sticker, so it doesn't matter what one's on the machine as long as it's the same version.
However, the Dell copy of Windows is also set up for the Dell hardware on the Dell machine the CD was made for, and, when it doesn't recognise the Dell hardware, it figures you just made a big hardware change.
And since you just made a large hardware change, you have to reactivate Windows.
And since this is a *huge* hardware change - a completely "new" system according to the Dell installation - it fails reactivation.
Right now, there are two possibilities:
A) The guy has a legit retail Windows license, you've just installed an OEM copy that he DOESN'T have a license for, but there's really no harm done and you can reactivate by phone. Tell it to activate by phone, call the MS rep, tell them you just reinstalled Windows, yes this copy is only installed on one machine, and they'll give you a key to manually activate it.
B) The guy doesn't have a legit license at all. In which case, you can still activate it over the phone, but then you're a party to software piracy.
There is no C - if he had a legit OEM license, the sticker would be on his machine, because OEMs are legally required to do so by the license itself. Some people don't do that when they build their own machines, but that's their call. No reputable computer store will do it for someone they don't know really well.
You're in a bit of a bind.
My solution:
Tell him that without evidence of a license, you cannot activate Windows for him. Let *him* call Microsoft and talk to the rep and put in the code. Or sell him a new copy of Windows, but I really don't suspect he'll take kindly to the $500 price tag on XP Pro Retail, and you can't get XP Home any more. So, if it's legit, tell him he has to do it because he can't prove it, and if it's not legit, tell him he has to do it because then it's his act of piracy, not yours.
In the future, ALWAYS get a license key before reinstalling Windows. Either get it off the sticker, out of the retail packaging, or out of the Windows installation itself using a program like Keyfinder.
