I recently purchased a 1998 323i and am having pretty much the exact same problems.
The car itself is beautiful and also got itself a little makeover at factory with some of the M options (including the suspension YAY).
As above the problem with my car is that it seems a little sluggish when accelerating through the lower gears until it reaches a certain rev range (4 to 5 thou . . just as the above problem).
I am going to do all of the above which has been suggested and have also previously purchased a m50 manifold before I had even read this fortunately (a friend of mine is German and a BMW maniac and said that the m50 manifold upgrade was the most common thing done to 1996+ 323 and 325 models)
I am going to be doing quite extensive performance upgrades to this car and will be starting my own thread in the appropriate section very soon, any help and suggestions will be greatly appreciated.