Will newer style radio work in a 124?
 

This one with the phone keypad:
http://i.ebayimg.com/00/$(KGrHqMOKnQ...hPpHw~~_12.JPG

Will it work in a '95 E320 that now has this radio:
http://i.ebayimg.com/00/$(KGrHqYOKi!...0pcnzw~~_3.JPG

With some hesitation I would say yes. I think there are speaker outputs on it, so if you get everything connected properly it should work. You'd have to run fiber optic/D2B lines to get it to work with a CD changer for example. You might not be able to program the radio to work properly with anything on the fiber optic lines. But just the radio itself should work.

I put one in a '95 S-class and it worked fine but it didn't have a CD changer in the trunk like this car. Would the old CD changer work with the new radio?

The fiber optic ring was introduced about MY2000 (?) and the old and new radios/changers are largely incompatible. For that radio you will want a changer of the same vintage.

Although you didn't ask, why stay with a changer that only has 6 disks, requires you to stop the car to change disks and frequently doesn't work. Have you considered adding a AUX-IN cable to the changer output of that radio and using an MP3 player? Essentially unlimited music on something smaller than a Smart Key.

If the radio will work, the cd changer will work, but you'll need to run the fiber optics line. Saw a guy once add the cd changer to under the dash because he didn't want to have to go in to the trunk to change discs in the magazine (real hard driving guy I guess, no stopping unless he HAD to!)(car was a 210 chassis diesel though).
Only possible problem, as I mantioned already, is it would be almost impossible to change the programming in the radio. MAYBE if this radio is already programmed for the changer it will be a non-issue.
You will need to change the car connectors no doubt (rewire the connectors)

You've failed to post the year of your W124, but for sure the earlier models came with 2-channel radios. ALL newer radios are 4-channel, which means you'll have to modify your speaker wiring and lose the fader switch.

Oh and that's right, for the D2B CD changer to work, you need 3 wires, power, ground, and what I call the "wakeup" signal from the radio. So it's all doable but it gets complex to the point of wondering if it's really worth it. But the guy I remember that glovebox mounted (or underdash mount?) his CD changer made it all work. He had the advantage of having a car that was D2B to begine with though.