Upgrading (assuming you follow the instructions) won't overwrite his plugins or his theme but it might break them. If, for example, a plugin or a theme uses a function that no longer exists or that has been altered then it will break either dramatically, giving you an error, or subtly giving you results you don't want. The former is a lot easier to find and fix. Hope for that one. :)
You also need to worry about core edits-- meaning edits to the core WP files. These will be overwritten. To maintain the functionality you'll need to recreate the edits in each and every new set of files. I don't know if your friend's site has any core edits or not but its possible especially in the case of the widgets. Some widgets ship with WP-- text widget, basic search widget, the meta login widget, and some others. Editing those counts as a core edit in that they reside in files that will be overwritten with each update.
Creating a new 'front' won't solve your problem. The front is just a theme which is small component dependent upon the rest of the system and the rest of the system is what need to be updated. Plus, your database needs to be updated. Significant changes have been made to it since 2.1.
You are also going to need to upgrade incrementally-- 2.2->2.3->2.4 and so on-- or your are likely to encounter problems. Don't try to jump all the way to 2.8.