Just did this. costly repair...

The transfer case has two driveshafts coming out of it - one to the front, one to the rear.

The rear is a flange with a rubber guibo. I don't recall hearing any problems with that except the rubber wearing out at high miles, and that is an easy repair.

The front has a female spline on the TC (front drive shaft has male spline). It is sealed from the TC fluid by something that looks like an engine freeze plug. The spline does not see TC fluid. There is a rubber boot on the end of the front drive shaft that should keep water/debris out of the spline. Keeping grease in there does seem like a good idea. Perhaps we all just need a new boot designed with a grease fitting on it...

The input and output shaft seals on the TC that keep the fluid in can also go bad and begin to ooze, but that is usually not catastrophic - you should notice the drips and have time to get them replaced.

Its painful just because BMW charges so much for the danged parts. The dealer wants something like $800 for the front drive shaft that does not have a universal joint or CV joint in it. This should cost much less than a front axle that has two CV joints (and can be bought from reliable sources for $300-$500). Likewise, BMW doesn't sell the output spline piece of the transfer case, but tells you a whole new transfer case is needed for $3000 or so. BTW, There are places to buy the output spline if you do need one.

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David.X5
2001 X5 4.4i Sport
SOLD! at 160k miles