There really isn't much difference between Dexron II and III.  One is simply a
more recent formulation and they are compatible.

Either of them would be fine, but I use III in my 525i's.  You could also go to
a synthetic ATF.  You really can't go very wrong in these older GM trannys.

I have to be much more careful in choosing the ATF for my 1999 740i, as it is
supposed to only use the expensive, so-called, lifetime fluid from Esso.  Other
fluids might not mix properly with the Esso that is not able to be drained, and
also could cause problems with the seals in the transmission.  

However, in your application, just about any decent ATF will be fine and is
compatible with the Dexron II that should be in it already.

Dick Schneiders