MK3 to MK4 is plug n play, but *before* you unplug the mk3.

Goto the car open the drivers door,
Then goto the nav computer wait for the red led on the drive to go out,
Then press eject on drive,
Eject the map disc,

Use some radio pullers (or small screwdrivers) to get the nav unit out.
Unplug the old and replace with the new.

If you don't follow the steps above the you risk damage to the mk3 and it may leave the mk3 in a "funny" state, bad news if you are going to sell it on.

As for the other questions, you can use either a cd or a DVD to update the software, but use a cd as it's expected in that media.

3-1/20!!!, this is very old indeed, upating to 3-1/63 will improve the MK3 no end, make sure you use the correct mode formatted image though.

HTH

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Sept 03, M3, Silver Grey. Retro-fits: Modded Mk4 DVD Drive, OEM Bluetooth, VR Control, Rainbow Speaker Upgrade, Sony SOT Amp, HK Sub, CCFL, Intravee II, NightMode.