Took it out for a drive a few minutes ago to warm up the diff slightly before draining. Some more symptoms:

Above 20mph, sound changes and is faded out a bit. Probably because the moving parts are moving faster.

If I take my foot off the gas at above 20-30mph, the sound goes away from within the cabin and sounds its just coming from the outside. It is still aparent and comes back into the cabin as the car/suspension settles. If I press on the gas again, sound reappears prominently throughout the cabin.

At about 30mph, if I put it in neutral, the sound goes away slightly but in the same manner as it does with taking my foot off the gas, which is what i did before putting it in neutral. Engaging drive again and the sound reappears.

It is definitely more prominent and loud below 20mph.

I'm now leaning towards the RWB. Only explanation for the gear oil smell is that the diff is working overtime to move the wheels forward.

Read my last post, posted it at the same time as you.

Thanks Olemaxi. I'm going to post up some more vids and pics in a few minutes. I've got it on jack stands now.

I've just updated my original post with more vids and pics. Looks like I might have found my prob.

Front seal on the diff appears to be leaking.

I drained out 1/4 quart of fluid this morning but on the weekend it took about 3/4 quart fluid. I didn't see the leak until I got to the side of the diff.

Now what??

OK so upon a suggestion from a buddy of mine - I filled it back up with fresh fluid. This time it took 1.2 quarts. As I reversed, I still heard the grinding. Took it for a spin around the block and it didn't get any better....

Any metal filings in the drained fluid?
Start the X while on the stands and drive in gear at slow speed.
I would then listen at the differential or at the wheel with a mechanic's stethescope.

If this procedure scares you then better to take to the $tealer or if you can get a tire place/workshop to use their equipment to get the X of the ground for a small fee and drive in gear.

I dont' see any metal filings in the fluid. However: I called 2 dealerships and spoke to the parts counter and the shop foreman at 1. They both said that the vehicle calls for Castrol SAF-XJ (75-140) as it has a limited slip in it. This is for both the front and rear diffs.

So for 1, I definitely don't have the right weight in there as I used 75w-90 and it had no Limited Slip additives.

Talking to a buddy of mine who has his own race team, he said that the combination of the low fluid level and wrong fluid could have caused one or both of the side diff bearings to go bad and that's actually making the noise.....

Ouch ... I know how it is when its self-inflicted pain. Everybody's gone through that at least once. Keep us posted.

May have messed up the clutches too.
I think the clutches would go before the output shaft bearings/pinion carrier bearings.
If it is diff, I would source one from a recycler. BMW pinion, ring, spider gears, bearings, seals, crush washers are expensive.
Labor may be like 5 hours plus.
Certainly an almost easy DIY if you get complete diff from recycler.

OK so the car is in good hands at a local german car dealership about 4 miles down the road. They sell and service mostly BMWs, Porsches and Volvos. I was actually able to drive it there at about 30mph. Tech drove it about 10 feet and looked at me with this look like - 'Ouch'. He said if it got warm enough on a long road trip (which I was planning on this weekend) it would've locked up on me.

They quoted 4 hours labor for the job. Labor total is $340. They'll call me tomorrow with a price on the diff. They'll also let me supply my own part if I can get it cheaper. Bavarian Recycling has it for $480 shipped but 7-10 days. I have a rental in the mean time.

Basically the tech explained that since it had a leak before I even did any service to it, putting in the lower viscosity fluid allowed it to fly out of the leak @ the front seal even easier. That in turn left me running on about 20% of the fluid required which burned up the diff. When I pulled into the lot, the front seal was leaking bad.

Apparently the diff is an LSD type in the Xdrive models.

For the Xdrive models they spec Castrol XAF-XJ (75w-140) which retails for roughly $20/half litre. But they said Redline or Royal Purple 75w-140 with LSD additives will do the trick.

The dealer I purchased it from would not 'goodwill' it and still wanted me to tow it down there (2hrs away) and charge me $125 to diagnose. B@$t@rds.

So in the end - self inflicted but I basically exacerbated an existing problem. All in all - glad it happened now than on a long road trip with the wife and kids in the car.