Helping people with computers... one answer at a time.
Harddrives often contain more than you think. Replacing or losing one may also cause system recovery information to be lost as well.
I have a Dell Dimension 8400 running Media Center 2005 (XP Pro.) There is a process that I can initiate during system boot that allows me to take the computer back to its original factory settings/state. If I remove the original hard drive and install a new larger drive on this machine then install Windows 7 on the new drive, will I still be able to use this factory settings option if I switch back to the old hard drive or will the BIOS be changed in a way that will make this impossible? I have a USB hard drive case I have used in the past for this drive and would like to use it for back up files but would also like to be able to switch back to XP with it if I don't like 7.
If you replace the hard drive, you will lose that factory reset ability, yes.
But, in all honesty, from what you describe it's not that horrible a thing.
Let's review how the factory settings reset works, why it'll go away, and what you should be doing instead anyway so that you'd never to rely on it anyway.
First, let's be clear that this has nothing to do with the system BIOS. At boot time, the BIOS has basically just enough information to locate (and perhaps test) hardware and then find the harddrive from which the system is supposed to boot.
Everything else is on that harddrive.
And yes, "everything else" includes the information that's used to restore to factory settings.
It's actually pretty easy to see: on many machines you'll find a separate "D:" partition, often just a gigabyte or two. (On some machines this partition doesn't actually appear as an active drive, but can be viewed using the Disk Management tool.) In that partition, you'll see various files and utilities that comprise the recovery information for your system. When at boot time you elect to restore your system to its factory settings, it's the software on this partition that's used to do so.
So by now you can see that if you remove the harddrive then you've removed the information required to perform that reset.
Personally, I really don't like these partitions for a couple of reasons:
They take up space.
They're a convenience at a critical time, but even so, they aren't necessary.
If your hard drive dies, the recovery partition dies with it.
That last point is the most overlooked and the most critical. In your case, you're electing to swap one working drive for another, which I'll talk more about in a moment, but it's a choice. You can make that choice knowing what the ramifications are.
If your hard drive dies, which they do, you have no choice. You'll replace it with a new, empty hard drive. At that point without backups or installation media of some other form, like CDs or DVDs, you'll not be able to restore your system. That's why I harp on making sure you get installation media so as to be able to reinstall or recover everything on your machine without needing anything to be on a hard drive to start.
And if you have that, then the recovery partition is pretty much redundant. A convenience, but redundant.
If you don't have the original installation media, then the solution remains simple: back up. Take a full system image snapshot as soon as you get a new machine, periodically, or at least in preparation for any kind of upgrade. If you have that, you'll always be able to revert to it in case of failure, or simply because you don't like the result.
In fact, with periodic snapshot backup images, and/or regular full+incremental backups, you'd simply never need a recovery partition.
And of course you should be backing up that way regularly for any number of reasons, so in reality you should already have it.
Now, let's talk about your specific scenario a little more.
You have in your machine a hard disk that has Windows XP, and apparently Dell's recovery partition.
Your plan is to replace that hard drive with a new one, and install Windows 7 on that new one. The result will be a hard drive that has only Windows 7, and none of the Dell recovery information.
Your solution's actually pretty simple: don't discard the old hard drive. If at some point in the future you decide you don't like Windows 7, you could then simply swap your hard drives back.
At that point you'd then decide how best to migrate your Windows XP setup to your new hard drive.
I'm guessing that will then involve a full backup, hard disk swap, and a restore.