Possibly VANOS problems? Where exactly is the sound coming from? If it's the
front/top of the engine, it may well be VANOS related.  This would not
explain the 'knocking' though. Get onto one of the M3 boards or forums. I
seem to recall there being some 'issues' with the bottom-end of some M3
engines.

JB

It might be the VANOS unit (That's the variable valve timing actuator).
 What oil is in the engine right now?  They (VANOS) are known to make
noise if the oil you are using is too low a viscosity.  It is actuated
by oil pressure.

My '95 325i made a racket when using Mobil 1 5W30.  I now use Mobil 1
20W50 and it's much quieter.  20W50 is within the range of oils for use
in my engine.  Check what is recommended for yours and try one at the
heavy end of the spectrum.

It would be worth your while to pick up a mechanic's stethoscope. This
is like the one the MD uses but instead of the flat COLD disk - it has a
long metal probe on it.

Using this - you should be able to determine exactly where the sound is
coming from. It might be as simple as you are hearing the injectors..
good injectors DO make some clicking/tap sort of noise. Dirty plugged up
ones are quiet.

Without localizing the noise a bit - it's just guesswork on anyone's
part (which you've gotten already..)

It would also be useful to know what engine you have in the M3.. In the
US this was an S52US - which is basically an M52 in 3.2L size. In Yurop
you got the regular S52 - which is a real M engine with solid lifters.
If this is the engine you have - you may be overdue for a valve
adjustment. The US engine doesn't need this since it uses hydraulic lifters.

Given the name Niles (not a very common US name) - I'd guess the UK, but
that's just guesswork.