There is obviously no disputing the "legends of Gallifrey" Jack heard about were probably from the 51st century,
I rather imagine that Gallifrey is to the rest of the galaxy throughout time as Atlantis is to us -- a legendary, semi-mythical civilization that was said to be far more advanced than anyone else but mysteriously destroyed.
Think of the Doctor as the last of the Atlanteans.
That's a brilliant comparison and it adds to the fairy tale quality of Doctor Who. As Cyke101's post suggests to me, no matter when in the history you are, the Timelords and their legendary accomplishments and struggle against the Daleks are a thing of the distant past -- the same distance back, as though that piece of history has taken a right angle to the usual linear perception of time.
Sure, it all sounds nice on paper, but when you take the time to pause and think about it, that's when you run into serious problems.