Yes, you can use AD groups to create audiences. You need to add a rule under
Manage Audiences. Select "User" is a member of and then include the domain\name
of your AD group.

Yes, that works if the group memebers are explicitly granted access
to the portal but it does not appear to work when a group is used to
grant access to the portal. If you grant a group called ProfService
Reader access to the portal then setup an audience rule that says
User is a member of ProfService there are no members in the group
after you compile it. My real question is do I need to individually
add each of the members of the ProfService group to the portal for
the audience to work?