SPDIF is the proper term for coaxial digital connections. You have two options for digital sound connection (three really but you won't be dealing with 1394 at that price level), TOSLINK (fiber optic) or SPDIF (Coaxial). SPDIF is more common on soundcards and motherboards. You just need to make sure that whichever the receiver has, so does the option you go with.
Personally, a cheap receiver and a nice set of real speakers is my preference as well, however, you'll only be able to use Pro Logic on most games as they don't contain a pure DD or DTS audio track (Doom3 being one upcoming and noteable exception). This will somewhat limit the positional effect.
As to the sound card, again, I'll stress that you need to figure out what he has now. He may already have a digital output depending on his motherboard or sound card.
Another option would be to replace his motherboard with an nForce2 board that has the MCP-T southbridge (I can help you pick one if this is the path you choose). It will actually encode all the game sound into DD and then pass that off to the receiver to maintain the positional effect. Of course, this may mean you need to replace his processor and memory depending on how old they are...
