99 E300 D turbo W210 722.6 transmission

I've been having transmission issues off and on since the summer. Basically I would put the car in Drive and it would go into first gear but when I accelerated it would never shift out of first. The solution was to stop, put the car in Park and then back in Drive. The car would drive as usual. This would happen once a week or two and once the car shifted to second gear everything was fine. Also, as a note the car would not start in 2nd gear or even manually shift gears while this was happening.

As the weather got colder this would happen more often and I started to notice that it only happened when the trans was cold and never hot. For example, the problem would show up in the morning if it was in the 30's or low 40's overnight. Once the trans made the shift to second gear it was fine. If I stopped somewhere on the way to work the car would work fine but if it was cold that day I'd have the problem heading home from work. After looking through a number of posts in the forum I figured I needed to check my trans fluid level and that is was probably low. This caused me break out in a "what no dipstick?" rash. Anyway, since the car has 115k miles a trans fluid change would be a good place to start. Well that was last week and I was trying to find the time to do it. Since I plan on having this car for a while I figured the aamco power flush was a good idea. Also, I didn't have a good experience at the local MB stealer.

Well it's been colder here in NJ this week and the shifting problems have been daily and even when the car was warm. The first place that had an appointment was Aamco and i took them up on their free diagnostic which only came up with the following:

1. Transmission Fluid level was OK.
2. Transmission Fluid was burnt and had metal particles in it.
3. Car showed a few ODB II codes but none tranny related (i.e. headlight out that i know about).
4. Transmission showed no ODB II codes. I told them to do this but i'm not sure they really did.
5. They noticed the shifting problem as well as a slipping problem which i only felt yesterday.
6. I also noticed (with the headlights on) that if the D (Drive) was not lit up the car wouldn't shift. If I wiggled the shifter to light the D then it would shift fine.

At this point I was remembering what all the other posts here said regarding transmission problems: don't wait get it looked at right away!

My choice was leave it at aamco who assured me he could do the job or get it to a MB dealer (tomorrow) who could read the top secret codes and fix it (whenever they could fit me in). The wife was at work and I need my car sooner than later so I left it with aamco. Labor in and out is $495 then parts and labor to fix are extra.

So here are my questions:

1. Any idea what the problem could be? I've read about electric kit replacement and some kind of air/vacuum filter on the tranny itself. Could it be electrical because the 722.6 trans is electric shift.
2. Metal particles are not a good sign but does that mean a tranny rebuild?
3. Anyone else have similar problems and what happened? Should i just get the complete rebuild now (not my first choice)?
4. Other opinions or comments?