I'd put this in the E36 forum, but I'd absolutely put an M3 LSD in the car. They cost like $500 plus labor. Shorter gearing should give you a power boost as well.
I guess it's possible the car has an LSD already though, think it was optional in '94.
"When you were born, you cried and the world rejoiced. Live your life so that when you die, the world cries and you rejoice." - Cherokee Expression