What it seems like they did is install something like a Viper, which uses the OEM key to bypass the EWS allowing the Viper to take over locking/unlocking/alarm. Then they simply got an E9x key cut to fit the ignition - once the Viper is installed the EWS is useless so you dont need the chip in the key, allowing you to use any key that physically fits and is cut to work.
Watch the video carefully from 0:30 - 0:40. He's not inserting the new-style fob into the ignition (you can see it hanging from the ring). You can also see the old-style key being pulled from the ignition toward the end.
Note that you never see the entire key ring. He may very well be pressing the new style lock/unlock button with one hand and the buttons on the old key with the other.
The chirp is the correct tone for the early E39s (1997 - 1998).
The lock cylinder in the E39 uses a completely different style key blank than that used in the E46+ cars.
This is actually my video, allow me to explain a little bit.
The second post is half way there. I used a Spal 80 module to interface with, not replace, the BMW EWS module. Then I modified the key to fit inside of the E9X key.
In the video you see me putting a key into the ignition. This is the normal E39 key. I did this to roll the window down, and show that I was able to roll the window up with the key.
I do I have plans on making this key have the ability to start the engine, but for now I have not worked all to much on them, since the car currently isn't in my possession.
I've been taking picture of stuff along the way, and I will gladly post a tutorial of how to do this. Just to clarify though, my goal is to completely by pass all BMW key procedures, while still keeping all the security features in tact.