Anything can be done with the right amount of fabrication.
VAC makes adapters for the E34 to be able to run Sparco, Recaro, and other brands of sports seats. They cost $220 per side.
I know of people over on bimmerforums who have installed Vaders and E28/E30 sports seats.
One of things that draws me to the E34 M5 is the seats. I would love to lose some weight but I love the way they look and feel. I would consider finding some good used leathers to replace your worn out ones and then fix the controls.
Check out 93FIM5's build thread as he converted his seats from electric to manual. Only caveat is you'll need to find another set of manual seats.
I think it's starts on page 26 onwards in his awesome build thread. I consider his build thread the benchmark for anything customized on our M5's!
I've got an entire black interior from a '95 E34 525i that is taxi leather (fake leather which holds up well) and is in perfect condition. I'm parting the car as I repair an M5 but don't need the seats. Let me know if you need them. Based in Texas.
I kicked around the idea of swapping them out for a set of seats from an Evo VIII, but the hitch is that the M5's lower seat belt anchor is integrated into the seat frame, and the Evo's isn't (sad trombone).