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Wow that's in pretty bad shape! No doubt Mango will pop in here with info on strut failure... but basically at this stage there are a few maintenance items you should be looking at. Let me find the thread for you...

Here you go:
http://forum.e46fanatics.com/showthread.php?t=923563

For the clunking noise, I would start with checking the following:
sway bar end links, ball joints, steering coupling, tie rods, struts...

Eliminate the above for wear / breakage due to mileage and age and go from there.

Do you get any shaking in the steering at speed or feedback in the steering when the clunking happens?
 

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hueyhy - ^ cool. Looks like you're on the right track already... maintenance before mods :D A few people have suggested BMAparts so I will do the same as I was browsing their site and found pricing for shocks and struts to be very good, so you may not have to spend as much as you think.

Hye - good point, it could be the shock mounts.
 
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