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.
I run a canadian led kit & hid kit company, if you have any questions about led headlights or hid kits in canada or would like to check out our products please contact me here: http://absolutehid.ca
Hot: 2001 Estoril M Roadster
ZCP 19's michelin supersports, ZHP knob, JL 8W3
Cold: 2002 TiAg M3 6mt deoranged, dechromed, led tails, ZHP knob, UUC SS v3, GROM, OEM 18's w310's,
Fun: 2006 YZF-R6, black, ohlins, pazzo, cat delete, vance hines csone, YEC racing tune