Steve, I have a '79 300D that also has a flaring problem. I tried to locate the modulator, but didn't have any luck. Do all automatic MB's come with one? If so does the 1979 W123 have a similar set as you described for AV ( the 1988 300E)?
I also have an intermittent not-going-into-gear from Park problem. This never occurs after the car has been running, but happens (sometimes) when it hasn't been driven for a while. To get it going, I rev then engine in Neutral or Park for a bit, then I can hear a quiet metalic whirring sound. Once this sound happens, it goes into gear. I don't think adjusting the modulator will cure this problem though, but I would like to find out what might be causing this problem.