There are no differences between the e46 323i and the 325i except for the year it was produced. Both have 2.5L engines. I think that BMW wanted to differentiate the 323i as the new e46 (which debuted with the e46 328i in '99). Only e36 318i/328i were produced in '96-'98, and from '92-'95 the only e36 sedans produced were the 318i/325i. There was never a 323i before, so BMW named the entry-level e46 the 323i so consumers wouldn't think that it was an e36. (e36 323is/ic were made '98-'99.) Like Ximian said, they probably also did it to further differentiate the e46 323i from the e46 328i. The e46 323/328 was produced '99-'00 and the e46 325/330 was produced '01-present. If you are looking to purchase an e46 323i vs. 325i, I'd go for the 325i because the bugs have been worked out of it.
