240zmania here are a couple of things you can do. If you're really looking to drop another engine in, do a search under 4AG. That's Toyota's engine designation for the AE86 engine. there are a couple of 4AG groups specialising in tuning and parts for it. You didn't mention how many miles the car had though, or whether it's running and how well it's running. The 4AG engine is actually a reasonably tough robust unit and if it hasn't been thrashed too badly and been take care of, even 200,000 miles is alright. Playing around with engines will cost quite a bit though.
If you want to check out the engine, the main thing is to see if the block is in good condition. Everything else is replaceable. have the engine pulled out by a good shop cleaned, and then have it hot tanked and magnafluxed. Check for cracks in the block, excessive wear and anything that can't be fixed by a little machining. If the block is OK, you can then choose to rebuild it with new pistons, rods, crank etc. as you desire, and your budget allows. Porting and polishing improves air and fuel flow characteristics of the engine and is considered a performance modification as opposed to smple mechanical restorative/maintenance.
As for your friend. Ask him what he plans to do with the car ultimately. The problem he has is that the MkIII has a 7M-GTE engine. (I used to have an '88 MkIII Supra Turbo). The MkIV has a 2JZ-GTE engine. Of the two, the 2JZ is the better engine in its mod potential. It is reasonably easy, if you have the money, to mod a 2JZ engine in the 600-700 hp region. The 7M-GTE though can be modded to about 450 hp, which was what mine was putting out. More than 450 hp from a 7M-GTE is much more difficult. If 450hp is enough for your friend, and it is for most people unless they want to seriously drag race the car, then tell him to stick with the engine. However, if he does want to make even more hp, the 2JZ can be tuned to produce about 1200hp. (That much will end up costing at least $50,000 most likely more)
If he does, however, want to go that crazy with the power, he's better off buying a MkIV Supra Turbo and going from there. Unfortunately, it isn't a simpe matter of his mechanical skills and what tools he has. The engines are different and have different mounting points in the engine bay. I'm not sure if you can fit the 2JZ engine in the MkIII engine bay and if you could, you would have to mod the engine bay a fair bit to be able to mount the 2JZ engine there. I've never owned a MkIV, but I have friends who do and it is a nice car especially in a straight line. Can be tuned for the track quite well too, but they can't beat my VR-4 in the curves, especially when I start drifting
I used to drift with the MkIII, but I sold that car quite a while ago. A good condition MkIV Turbo of course, will set him back at least $30k.
Hope this helps.