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Why update it? It looks great now. Do you mean mechanically?
If that's the case, start with a timing belt and water pump, change all fluids, check suspension bushings, consider an E36 steering rack, and read up on what type of suspension you might want. Check the brakes, as well, just to make sure they're in good shape.
That engine is limited by it's stroke and bore, but has the "731" head that was never offered in the states. The easiest thing would be to find a good 2.7L eta engine to swap that head onto, along with a 325i intake, tb, motronic 1.3 fuel injection, and 325i exhaust. I think that head will have the good cam in it but if not I'd use a 325i camshaft.
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