Three points/answers.
1) Yes, a Monk who's aware and able to move always threatens the area around him or her with unarmed strkes. He can kick, headbutt, knee jab, elbow jab, or body slam, he isn't limited to just hand strikes. He can use a reach weapon to threaten from a distance, and at the very same time he still threatens his immediate vicinity with the rest of his body. This is one of the benefits of the Monk class; their whole body is a living weapon, so they're always armed and deadly as long as they can move some part of their body. Of course, they're not a very powerful class, so their relative deadliness isn't all that deadly, really (the greatsword-wielding barbarian or fighter will pretty much always outclass them moderately to substantially in damage and accuracy).
2) Monks don't normally have proficiency in spears or any other reach weapons..... Did your buddy multiclass or take the Simple Weapon Proficiency feat? Or is he just taking the -4 nonproficiency penalty on attack rolls and somehow, despite his awefully-mediocre monkish Base Attack Bonus and the irritating 'multiple ability dependency,' managing to hit enemies with his spear?
3) With the wording of Flurry of Blows (at least in 3.5; I think 3.0's description is a bit more vague), a Monk certainly can use a weapon for attacks of opportunity and still perform a Flurry of Blows that round, and may still use that weapon for AoOs after the Flurry. He or she just can't use the weapon during their full-attack action for the Flurry. Unless it's a special monk weapon, of course, the few specific weapons that are allowed for use in a Flurry.
