Yes,

Turns out it was the drive shaft dust cap just before the actual transfer case! I wedged a flat head screw driver into the gap between shaft and cap and bent back the cap all around the shaft and the noise is gone. I assume that I hit something on the road and it dinged the cap and made it warp enough to scrap against the transfer case. Hope you get lucky and its the same thing.

This took me about 2 months, 3 mechanics and one distant specialty shop to figure out the cause in my driveway with a flat head screwdriver. And to think I was going to replace the transfer case!!

__________________
2003 X5 3.0i E53