This car is not beat on at all. 165,000 but runs well.

Driving along at 40mph and all of a sudden clunk and grind.
Get it home, jack it up, pull the calipers and the noise is still there.
top off the diff fluid. the same.

When i listen outside the car when running in drive, it seems to come from mid cabin.

Is it u joints?

Another odd thing it gets alot quieter in second gear (auto) but it shifts correctly.

When i spin the wheels by hand in neutral i feel no perceptible notching or resistance.

 

It is up on stands and i rotate the wheels forward ( car in N engine off) it only seems to growl or get nothchy in reverse.

I have an auto so the tranny can not be suspect correct?

 

If the noise is coming from mid-cabin, I'm inclined to think you have a transmission issue. If you want to rule out the rear, you can always pull the diff cover and inspect the gears. Given my history with the 4L60E, though, my money is on the trans. You have 163k on yours, and im amazed it held up that long. I just destroyed one at half that mileage with normal street driving.