It's illegal, but it can be done. General rule is that the engine should come from the same year or newer. Some states are stricter than others as far as testing, but the EPA is a federal agency, so the laws apply to the entire country. The only problem is when you go to sell the car. You'll need to disclose that the car has an illegal swap or the buyer can come back and sue you. The M42 is theoretically stronger due to forged internals and is said to be better for forced induction or even a 2.1L stroker application. However, if you're willing to go through all that work, you're better off just rebuilding your M44. A straight over swap M44 to M44 is pretty cut and dry. M44 to M42 is gonna be a little more complicated and for just a little more money and effort, you can just as easily swap over an M52 2.8L 6cyl or for a few grand you can do an S52 3.2L. Anyway, to simply answer your question, yes you can convert it to OBDI. It's not recommended, but do what you like. This thread should be pretty helpful:
http://www.318ti.org/forum/showthread.php?t=32610