There are plenty of people asking if gen 4's can retrofit headlights, but I haven't found a thread on going from the "stubby" gen 3 headlights to the longer gen 3.5 headlights. I just did the swap last week so I figured I'd toss this up to let people know it can be done pretty easily.
I went to the junkyard and found some brand new gen 3.5 headlights on a 96 camry that had been rear ended. I bought both headlights with assemblies and the front grill insert. You have to have the grill insert from a 3.5 gen as they are different sizes. I only paid 45 a piece for the new headlight and assembly with bulbs, and 12 bucks for the grill.
Remove the gen 3 grill (via the two bolts on top of the headlight bracket), the corner lights (via the single screw up top on the headlight bracket), and then unbolt the entire headlight assembly (3 bolts and 1 nut per side).
When you install the new headlight brackets, I put the nuts and bolts on finger tight first, then went back and tightened them up to make sure fitment was good. First I put on the nut on the side that is hidden behind the corner light, then the bolt that goes into the side fender up top. Then I put in the bolt that goes into the bracket in front of the radiator (it is also the horn bracket on the passenger side). Go back and tighten all the bolts up.
*The final bolt that goes into the top of the bumper does not line up. At least not on mine. So I did not reinstall this bolt. If yours doesn't line up, you could drill a hole and put in a sheetmetal screw, but it is not necessary.
Now just slip the corner lights back into place and secure with the screw up top. Now there is only one difference between your gen 3 and a 3.5 front end... The front bumper cover on a 3.5 has a slight raised portion directly under the grill insert so you will have about a 1/2 inch gap of space. You could leave the gap if you prefer, and simply bolt in the grill insert with the 2 bolts up top and you're done.
With the grill and bolts tightened the headlights are still firm and secure without the final lower bolt in place. However I did not like the gap under the grill so I took one final step.
I took a strip of garage door weather seal (the same that some people on here have made front lips out of) and cut it to the same length as the grill insert. Then secure that to the bottom of the grill with double sided tape. I put the stripping on so that the angled side is pointing out, but facing down, like this...
Then I bolted it on and enjoyed the finished product. My grill isn't perfectly even as you can see in the pics, but that's because my car was wrecked a while back and its still a little off, but your fitment will be correct. I double checked fitment on a second car in the junkyard with a straight front end before I bought the parts so I know it fits right. Here's some before and after shots...
Before:
After: