I'm not a lawyer, but I do see a problem with the seller's duplication of a copyrighted CD.  If the CD he is talking about is the CD that was shipped with the computer, legally it is part of the computer and should be conveyed with the computer to the new owner. With regard to installing the software from such a CD to the laptop, it is dependent upon whether or not there is a valid COA affixed to the case.  If so, you are free to use any Dell Windows XP installation CD that contains the same version of Win XP that is stated on the affixed COA.  The license is with the machine, not the CD. The D520 uses SATA drives, but I see no drivers for the AHCI interface in the D520 downloads.  This indicates that the main board translates the SATA interface to IDE so that those drivers can be used, so you should not have a mass storage problem.  The D520 uses a PCI-e video bus, however, so the installation CD must incorporate at least Service Pack 2 (assuming you're installing Windows XP). With regard to imaging the drive, while I've never done it, the recent versions of the popular imaging programs will see and use a USB port.  This allows you to clone the drive to a replacement mounted in a USB drive shell.  I'm afraid I don't know if the 2004 version has that capability.  The drive shells themselves usually work great; I generally clean install on my laptop, but I then connect the drive shell and import all my folders.
I just got off the phone with a man who has a Latitude D520 for sale that I was going to buy until I asked if it comes with the XP reinstallation disc. He said he doesn't have that but can make me a copy of his disc he used to install Windows on the machine, and that it would be legit. This is too deep for me. I thought that one could only install onto one machine.  If anybody knows what he is saying he will do and can explain it to me I would appreciate it.   On a related issue -- I have the XP installation disc  for my Inspiron 1100. If I were to buy the D520 (without a disc) I don't suppose I could use my 1100 disc should the need ever arise?   Last question, if I were to buy the D520 sans discs, could I make a ghost image of the OS? I have Norton Systemworks Pro 2004 with whatever version of Ghost came with it. Is it hard to do?   PS I doubt that guy is the original owner who could get the discs from Dell, and the D520 model does not come with PC Restore.
XP reinstallation disc questions