I am planning to kinda do the same thing.
Version 1 Apple TV + 7" LCD display = no more discs...
I am installing a first gen 40gb in my 2002 M3. The screen will be an add on and used as a visual display for the apple tv, as well as the back up camera and thermal night vision camera.
I can use the remote feature from my iPhone to control it when using the thermal night vision camera, and when under normal driving, the regular remote to control it. It will sync with my iMac at home while in the driveway, so any new music will be added.
I have to construct a housing for the screen, to allow it to mount on the dash. I'll be using fiberglass and part of a factory BMW dash (Look at the E90 series with iDrive for inspiration).
You can use the standard composite in by plugging it into the green cable on the old model. The 40GB storage means thousands of hours of music.
I was thinking about a Mac Mini, with a magic touch pad so I could support Google Earth with realtime traffic and weather, but the internet connection and fees would kill me (unless I jailbreak my phone and tether it).
I think the Apple TV will do nicely, and facilitate a need for digital storage. I will use the RCA audio out and interface it with a Dice Media Bridge unit, connected directly to the factory unit.
All in all, it will be slick. Totally hidden, and a "Wow" factor to my M3.