Finally sorted this out today and everything is working again! Here the lessons learned for others:
1) Check the actuator breather tube as part of regular maintenance (when greasing the drive shaft). As a preventive measure it would probably be good to cut about 1" of the tube off, which is the part that often splits, and stick the tube back on.
2) If you do get water into the actuator you will see different lights go on. In my case all 4wd and VSC related light were flashing. If that's the case don't try to change 4WD mode!
3) Immediately drain the actuator. I would try to only loosen the lower screw of the cover and cracking it open a tiny bit so the water can drain. If you take the cover off the gears will fall out or at least move (some of the pictures in other threads show the gears held in by two screws. In my case the position switch was screwed on to the cover so the three gears for 2Hi/4Hi/CDL do fall out when you take the cover off, not sure if that is a difference between V6 and V8 or there are different models of actuators for different years). If you fully open up the cover mark the position of the blue position switch as well as the large gear driving the shaft. Draining the water (and possibly drying the actuator) might be all that is needed to get things working again.
Had I done all of the above I would probably have saved myself a lot of time and hassle.
In my case I opened up the cover and gears moved. I had not marked any of the positions. To make things worse the transfer case was stuck in 4Lo (although it was in 4Hi when I entered the water, somehow the ECU moved things when I tried the switches) but the position switch for lo/hi was off so the 4WD ECU shut down (4WD light was solid, 4LO kept blinking). None of the buttons did anything anymore. So here is how I got all this sorted out (thanks to all the information on the forum and a lot of trial and error):
1) The first step after drying out the actuator was to get the 4Lo into a position the ECU was happy with. This was done by powering the motor through the connector at the 4WD ECU and then reading the positions. Details can be found here:
http://www.toyota-4runner.org/4th-gen-t4rs/243123-fixed-my-t-case-actuator-w-electricity-logic.html. The Training guide posted here
http://www.toyota-4runner.org/4th-gen-t4rs/147174-2003-4runner-4wd-problems.html#post1440184 was invaluable and I could not have sorted this out without it. To measure switch positions, you measure continuity to ground/chassis (with an Ohm meter). It took me a while to figure out that "Below 2V" in the document means there is continuity to ground (switch is closed). Once 4Lo is back in a valid state the ECU will start working again. If you did not open the actuator case this might be all you need to do.
2) Next thing was to time the 2Hi/4Hi/CDL portion. I knew there were three positions 2Hi, Hi4 with CDL and 4Hi free (in that order) but I wrongly assumed 4Hi was with the shaft was all the way inserted into the transfer case. The opposite is true. The actuators ship in 4Hi position so all the marks are made for that position. That was what I was aiming for especially since my ADD actuator was still engaged and I did not want to mess with that. So I set my controls to 4Hi and CDL off. After that came more trial and error but knowing what I know now getting it timed is pretty straight forward. Use the gear to pull the shaft all the way out of the transfer case and into the actuator (you might need to put the truck in D and move it forth and back a bit to get the shaft free). There is a mark on the gear driving the shaft. Place the gear so that the mark points to 3-o-clock (straight towards the t-case). That way the CDL switch is open but will be pushed down as soon as the gear starts spinning. Put the blue switch into 4Hi position (blue mark lines up with the mark on the housing), re-assemble and you should be done.
Unfortunately, I did not take any pictures as I was working under the truck mostly at night. But I hope the descriptions will help someone else. If you want to open a stuck actuator to fix it, I would suggest putting the truck in 4Hi with CDL unlocked so you can use the marks without guessing.
I am glad I got this sorted out, although I was getting excited about a manual transfer case! Definitely learned a lot about how the actuator works.
