That's a decent build. I would suggest adding another 2GB of memory. 4GB is the sweet spot for Vista/W7 and gaming.
Well, if you do get a new comp, he should get the old one. Seems fair to me.
You can download the release candidate of Windows 7
for free and use it until June 1, 2010. That should give you some time to save up for an OS. I would suggest getting the 64-bit version. With your new machine, there will be no compatibility issues and all the newer software is designed for use woth it.