Other than mountain lion the machine does't have limitations. No graphics card you can power from within the machine is going to have a noticeable difference between PCI v1 and v2 many tests all over the Internet show this I think Anand came up with about an 8% actual difference. Again the problems with an 08 is its still going to have an old card and in two months could have the same issues. The machines fake bitness will have nothing to do with future software as the folks running mountain lion on them will tell you the os will. They dropped support for two gens back when os's were released every few years not every year, remember they just re-offered snow leopard a few months back. We have another 5 to7 years yet before upgraded 1,1's become G5's. In the end it's always cheaper to fix what you got than buy used.
Not if you sell what you have first it isn't. If he sells that machine, buys an Early 2008 machine AND something reliable like a GT 120 or a 4870, he won't have spent all THAT much extra, and he'll have a machine that's more modern and current. Ordinarily, I'd agree that fixing an existing Mac is better than scrapping it and getting something else; but not when the Mac is encroaching its seventh birthday. That's where it makes sense to draw the line as any number of issues could crop up down the road and at that point, you're pouring money into a dinosaur. This is largely why most people with G5s tend to scrap their G5s and replace them with other G5s rather than fixing them; just not cost-effective.