Aftermarket head units will NOT fit in the upper portion of the radio, under the wood flip door. It is not quite high enough. Also, a portion of the factory controls (bass, treble, fade, and balance) are contained within that upper module, and speak to the lower main module over BMW's iBUS--you would completely loose those controls, and I'm not even sure if the main unit would still work. From what I've read, I'm pretty sure it wouldn't -- you either use both BMW units, upper and lower, or you rip them out and put in an aftermarket (which looks HIDEOUS in the E39 -- if I can find a picture I'll post it).
$550, while expensive for a CD player, doesn't sound too bad for the BMW CD. From what I understand they are actually around $800, but then the dealer will give you money back if you turn in your tape deck or something like that. Oh, and DON'T have the dealer do it -- you do it, it's literally a 5 minute job, it's so simple. See here: http://www.bmwtips.com/tipsntricks/My%20bu...20(archive).htm