The new Type S50 B32 engine was brimming with advanced developments. Double-VANOS now featured variable valve timing on both the inlet camshaft and exhaust, other updates including bigger inlet valves, lightweight pistons and graphite-coated conrods to reduce friction. By enlarging both the bore and stroke, displacement was up from 3 to 3.2-litres, BMW also increasing the compression ratio (from 10.8 to 11.3:1). New MSS50 Digital Motor Electronics was developed in conjunction with Siemens, it was the most advanced engine management system yet seen in a BMW and could execute up to 20 million commands per second. All M3 Evolution's came with an improved dual mass flywheel, modified vibration damper and supplementary oil pump to counter surging when cornering. With a new exhaust manifold, this package of improvements saw output rise from 286 to 321bhp at 7400rpm (maximum power now being developed 400rpm higher than in the 3-litre model). It was enough for the S50 B32 engine to break beyond 100bhp per litre, but this was not at the expense of torque, the headline figure of 258lb ft at 3250rpm belying the fact it was spread evenly throughout almost the entire rev range. The six-speed Getrag gearbox was derived from the E34 M5, sixth having effectively been an overdrive top to comply with new drive-by noise regulations.

Aluminium doors were used, these saving 10kg each over their steel counterparts. Although there was no exterior badging to denote an Evolution model, clear indicator lenses and a black mesh grille were instant tell-tale signs. Cabin changes were few and far between, just a new 'M' logo on the gear knob and restyled cloth upholstery for the door trim and seat centres. Thanks to the aluminium doors, overall weight dropped by 20kg to 1440kg but top speed was still electronically limited to 155mph. With the ECU limiter removed, the Evolution could reputedly have hit 180mph. 0-60 dropped marginally from 5.5 to 5.3 seconds. Options remained fundamentally unchanged with the exception of new digital climate control, a premium Harmon Kardon sound system and Burl wood inserts that had previously only been available on the Saloon. Additionally, when leather trim was specified, it now extended to the door inserts. Production started in September 1995 with right-hand drive Coupe's following in November. That month, BMW also began manufacturing Convertible and Saloon derivatives. As before, the Convertible came without the extended front lip and 'Vader' front seats but got M Double Spoke wheels and leather trim as standard. Meanwhile, the Saloon's equipment was little changed either although Evolution versions did run the Coupe's suspension settings whereas 3-litre variants had been set up for a slightly more comfortable ride.

Another new option was the Sequential M Gearbox (SMG) that could be fitted from March 1997 (March '98 for right-hand drive). SMG was a clutchless sequential-style gear shift for the six-speed gearbox, the driver changing up by pushing the lever forward and pulling back to change down. It offered both Sport and Economy modes along with a digital display housed at the bottom of the tach showing which gear and mode were selected. Finally, in September 1997, BMW reverted back to installing steel doors and equipped all cars with an illuminated gear knob. Production of the Saloon ended in January 1998 after 1990 had been completed, 964 of which were right-hand drive. The last M3 Saloon made to date was delivered to the Bavarian police for use as a highay patrol car. The Coupe was discontinued in December 1998 with 8962 built, 2845 in right-hand drive. Convertible production carried on for almost another year, 3870 being built in total by the time the last example rolled out of the factory in September 1999, 2107 of these coming in right-hand drive.

In conjunction with not getting the full fat 321bhp Evolution engine, US-spec variants also had to make do with the old five-speed ZF transmission. Furthermore, the Automatic gearbox option was no longer available on the Coupe. From September 1996, American customers could buy an M3 Saloon that was available in manual and automatic formats, the first time an E36 M3 had been offered stateside in a non-Coupe bodyshell. From March 1997, electric seats were available as an individual option (previously they had only been available as part of the Luxury Pack covered fully in Part 1). Then in September 1997 the Luxury Pack was dropped and a couple of its components introduced as standard. These included a front armrest and rear headrests (plus leather trim for the Coupe). M Contour II wheels became a no-cost option. The Coupe and Saloon were joined in March 1998 by a Convertible version which, like the sedan, came with either manual or automatic transmission. At the same time, a three-spoke 'M' steering wheel became standard across range. It is worth noting that all body styles featured the extended front lip, orange indicators and M Double Spoke II rims as standard. Production of the US-spec Saloon ended in May 1998 with 4574 manual's and 4036 auto's being completed. The Coupe was dropped just under a year later in April '99 with 11,793 built (all manual). Last was the Convertible which, having been around for less than 18 months, ceased production in August 1999. 2252 were made with the manual transmission, 4017 getting the automatic.