Yes, it's more than possible. What kind of stereo are you looking at putting in? 1 DIN or 2 DIN unit? Are you replacing other speakers? Adding subs? Basically, what are you really looking for? More info would be greatly appreciated on what you plan to accomplish.
Yes, you should be able to fit a 2DIN touch screen into the stereo location of the the E38. If it's anything like the E39 it will likely require some type of modification (usually to the air ducts) as they run behind the dash. I've seen people cut into the air ducts and re-mold them to accommodate the 2DIN unit. It sounds more complicated than it really is in all honesty. You might also have to fabricate a custom surround as well for the 2DIN unit but those are fairly easy as well...
In terms of head-units you have a lot of options. Alpine, Kenwood, Pioneer, etc. They are all really solid and offer a lot of the same features including navigation. In terms of a hard drive setup, you may need a car PC to run that type of feature. I'll look more into that.
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