Digital Goods

I have a client who wants to sell his software online. The way it works now is someone buys a CD, he creates a key for it to activate it and sends it out.

Lets say he decides to use PayPal (I looked through their site and it wasn't clear to me). His software is on a workstation (Windows) in his office, the site hosting is done outside (me - Linux). I guess the disconnect is between authorizing payment (PayPal) and generating an email with a serial number/key for the software. Sorry I don't know what he uses exactly to generate the software key. But as a wide overall view I am unsure how this would flow.

I mentioned PayPal because that is who he wants to use.

Will he be sending out the software cd via mail or will the software be available for download?

They way it works now is he generates the key and sends it out on CD. He wants to ideally have someone buy online, once the payment is accepted he is sent a key via email. BUT the software that generates the key is not in the same location as the web server plus the payments will be processed at PayPal. So I am not sure how to get the payment authentication, generate a key, and send the key to the buyer automatically.

You can use Paypal IPN to send the transaction info to your server. You can receive the data and use php to check if the payment has been approved and then send an email with the key to the customer.