As this continually comes up, I thought it would be good to post a recent tech column answer from Bimmer Magazine as to why you should only use BMW coolant. This is from Mike Miller's Tech Q&A column in the Dec. 2006 Bimmer, page 36. Mike also writes for The Roundel (the BMW Car Club of America magazine). As I have noted before, if you are a BMW enthusiast, you should belong to the BMW CCA if only to get Roundel, and you should also get Bimmer which caters a little more to newer and modified cars. You'll learn a lot from Mile Miller's columns, and read them all as many questions cross BMW model lines, such as from the same Dec column he talks about considerations for putting larger wheels and tires on an E36 that would apply to E46s as well..
So here is Mike's comments, that I'll take liberty to paraphrase a bit (and I'm not responsible for typos!).
"BMWs are incredibly sensitive to operating fluids, including coolant. I've always felt this is due to the metallurgy used in the engine construction, but there is no way to know for sure. On neglected cars, aluminum oxidation builds up in various places within the engine, including on older models, between coolant hoses and aluminum fittings. That is the most obvious manifestation of aluminum oxidation. It causes the worst problems inside the sometimes tiny coolant passages of the cylinder head, where it can act like hardening of the arteries, restricting or even cutting off the supply of coolant to various parts of the cylinder head. This sometimes presents itself as phantom overheating with no known cause, though more often than not the cylinder head gasket blows before that.
I learned long ago that using phosphate free Original BMW anti freeze mixed 50-50 with distilled water and changing it every 2 years, of even four years on hotter running OBD-II modules essentially eliminates aluminum oxidation. The cars I maintain don't blow head gaskets or have chronic overheating problems. ......................."
again, credit to Bimmer Magazine and Mike Miller