[-BEASTMW-]

Two reasons:
1. The aforementioned two-year gap (think how fast we went from clunky single clutches to awesome dual clutch boxes). I remember reading that SMG simply wasn't ready.
2. I think BMW was not trying to invest a huge amt of money into the E39 M5, which makes it all the more amazing they did such a great job. They had thought the 540i would be enough (this is the true story on record) but when AMG came out with the first E55, BMW unexpectedly had to step it up, and so the E39 M5 was a bit rushed, cutting corners in places. Evidence: Extensively modifying the 540i engine but using the same headers (very restrictive) and same size clutch (definite weak point). They weren't about to sink a ton of money into developing an SMG for the M5 - especially considering it would never sell in the volume of the M3.