I have to say that as a bit of an audiophile, I went ahead and optioned the HK system in my 135i. The cost increase over the cost of the car is actually pretty minimal, and it's worth it. While it's not a great system, it's probably as good as you're going to find in the relatively crap listening environment of a car. Yes, BMW has the even better system in the M3 and other high end cars (and you can order it individual on the 3'er in general) it's probably overkill for 99% of most people's listening pleasure.
I'd say the only times you'll ever really notice the HK is not a blindingly good stereo are either (a) when really cranking the bass to get a night-club feel to the music or (b) when trying to listen to softer parts of Mozart's Requiem as played by the London Philharmonic. Good luck with either, and these are both pretty extreme. In the first instance, the HK tends to run out of steam (small subwoofers) but seems to pretty well resist distortion, and in the latter... well... if you can hear that over the exhaust then you're spending way too much time listening to music instead of driving your car
Having said that, the stock system is not good. It distorts easily even at moderate volume levels. There's no real definition to the high frequencies, and the lows are really muddy.
Of course, all of this depends a lot on the source as well. 128kbit MP3 is going to sound like crap on the best stereo system... while lossless or well mastered CD's on a good system are going to sound phenomenal. Of course, a lot of modern CD's are badly mastered and sounds pretty bad no matter the system they're on... but that's a rant for another day