There has been a lot of speculation on the subject of an engine Evolution on the E46 M3, so I thought I'd add some facts that others haven't posted yet:
Those who say there will not be a V8 in the E46 because it would dethrone the M5 are forgetting that the E39 5-series (which the current M5 is based on) will be replaced with the next-generation 5er (the E60) within 2 years. It'll probably take at least another 2-3 years after that until the E60 M5 comes out. (Remember that the E46 was introduced in Germany in March/April 1998 -- over 2 years ago -- and the M3 is only now coming out.) This would leave quite a gap in BMW's model lineup, with the E46 M3 being the most powerful "volume" model competing with the Mercedes AMG C-class and co. (The Z8 hardly qualifies as a "volume model", and the 750i/iL doesn't compete in that class. Any other BMW's north of 330 hp I forgot about?) Sounds like medium-term, there's space in BMW's model lineup for a more powerful engine (maybe as an additional option for the M3?)...
Counterpoint: Those who say the BMW will have to put a V8 into the E46 M3 because they'll do it for DTM anyway are forgetting that race cars are pretty much one-offs. Audi is putting a 90-degree 4.0 liter V8 into the TTs (and also stretching the TT's wheelbase bigtime) they're entering in DTM -- I don't see Audi selling a 4.0 liter V8-powered TT anytime soon. One of the things that makes DTM attractive is that the rules specify a number of standard parts that all cars have to use (e.g. the rear spoiler, wheels and tires), which keeps the costs down... Cost explosion is what killed the previous DTM in the early-mid 90's.