AFAIK you are correct: the lights are not meaning that a transfer of traction is going on BUT some control from the electronic over the traction "system" ( I hope I make myself clear).
The 4wheel traction is not an option you can select or de-select.
I do not know how much torque the electric motor is applying to the plastic gear and then to the other parts of the mech chain. But it seems pretty logical to me that this is the weakiest part of the transmission "train". Maybe I am to quick with my conclusion but I tend to believe the gear is the problem. The problem is that the gear is not an available spare part so the owner only solution is to have the full assembly replaced with high cost. So far I never heard about a real mechanical failure of the transfer case. In the italian forums there are some cases that have been simply solved with TC replacement without knowing the real problem.

I forgot: is anybody willing to post a good pic form a TC gear (a good one and a stripped one)

PS: actuator is the same on ATC400 and 500. Book says only difference is one more clutch disk for the ATC 500.

Isn't the gear within the actuator? And the actuator is a listed spare part? Is the whole assembly you are referring to the actuator motor assembly, or the transfer case assembly?

the gear is into/with the actuator (and it is NOT a service part)...and the complete actuator assembly is - off course - an expensive spare part.
We had another community member who solved the problem with a one hour job of taking off the actuator assebly and put it back with the bronze gear. Reset of software..problem solved...
Total cost 230 € (recicled assembly with bronze gear)

Photo of TC Actuator motor for E53
 

Here is a photo of the TC Actuator motor for E53 showing the plastic gear. I found this on 4wheelsautoparts.com who carry a lot of genuine replacement parts.
I went searching because I am having the same problems described with my 2004 X5. My local dealer says that I have to replace the actuator motor but I'm seriously considering having the gear built of bronze or similar material.

Can any one help!!!
I have a 2006 X5 and my Actuator motor has also packed up. The main dealer is advising after charging me to view the fault that i need a new Transfer Case at a cost with labour around £3000.
As the car is less than 6 years old and has only done 66K miles do you think it would be wise to take them to the small claims court?

Mark

Actuator photos
 

I just got around to changing my actuator on my 2004 X5 3.0d and couldn't help but do a full "autopsy" to determine the "cause of death":D.
Thanks to Neilrmp, I found out exactly where I should start.
The photos that I attached show the actuator with the covering plate and oil seal removed and also with the electric motor removed to expose the working surface of the gear ring. It appears that the worm gear shaft on the motor wears away the surface of the gear ring after some time.
I feel some sense of closure now that I have seen exactly what has caused this failure.
Maybe BMW should choose materials that take a longer time to wear out or at the very least produce a more affordable replacement option.

I was happy to help, is the X in T&T?, if yes, I will bring my GT1 down when I am coming on vacation, maybe I can help some guys with Bimmers.. who don't have access to it.

My X5 is one of many E53s here in T&T and there are many E70s as well.
I am certain that there are guys who would welcome any assistance/advice from you when you come on vacation.
Are you of T&T heritage?

yes I am from San Fernando, I will be in touch before I come.