I have zero knowledge about e46 audio systems, however.
In my e36, adding an aftermarket headunit made an enormous difference. I'm not an audiophile, but i do enjoy clean sounding music, and even just having upgraded my HU, the sound became clear and crisp, perhaps only really lacking in bass. Once i added a subwoofer/amp to the system, it started really sounding great.
I'd just do HU first, although for e46 i'm not sure what options you have. I'm sure you could get a single din deck, but it may look strange.
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