The illegal act was a copyright violation: he made and distributed copies of copyrighted material without the consent of the copyright owner. I would be inclined to argue that his use was fair use, but based on what I know about copyright law, that argument is probably a stretch, and he didn't raise it in his defense. He plead guilty to the charges.
As to sentencing, the sentencing guidelines make the value of the illegally distributed goods the primary factor in determining the sentence. There is no objectively correct answer to this question, because no one sells license-less restore disks for any price. The three closest comparisons are
(1) The free restore disk image download offered by Microsoft. This is the same intellectual property, but doesn't come with a physical disk.
(2) OEM Windows disks that Microsoft sells for $25. These come with a license (unlike the defendant's disks) but do come with a physical disk.
(3) The original restore disks that come with a new computer. These match perfectly the intellectual property and the physical form, but they only come bundled as a small part of an expensive package, so it's hard to get a fair price from looking at this.
The defendant argued the free download was the better comparison, the prosecution argued the OEM disks were better. The judge sided with the prosecution, and assigned a value of $25/disk, which resulted in a stiff sentence.