I've recently been experiencing problems with the transmission on my '98 ML. It started one day right after I started the truck. When I went to put it into reverse, I could feel a much greater shock to the driveline than normal, shifting to Drive, I felt the same big shock. Shortly after this the "Check Engine" light came on. After the truck warmed up a bit, I tried shifting back and forth and the big shock was gone, but the "check engine" light strayed on despite restarting vehicle. A quick read with an OBDII scanner showed a P0700 transmission fault code. After reseting, the light came on again the next day.
After resetting a second time, the light no longer comes on, but now sometimes when the car is slightly warm from sitting a while after a drive 0 about an hour, I find that the transmission seems to be starting out in second gear in reverse and drive. This has happened twice today. After a little while, it returns to the normal first gear starts. If anyone could help me diagnose this, I would really appreciate it - Gilly?

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-98 Polar white ML320 - M1 Package, Bilstein Shocks, H&R Rear Lowering springs, monochrome paint scheme (like MY2000+ ML's), ML430 wheels and tires, MY2002+ halogen headlights

The check engine light and trouble code indicate a problem in the transmission (as if you didn't know!). What needs to be done is to get the trouble code out of the ETC, which is the transmission control unit. The engine control module and ETC kind of work together to inform you there is a fault in the other system. It would make more sense to just have a seperate transmission fault light, but that's OBDII for ya!
You may need to visit the dealer to get the ETC codes read out, not sure if this is true or not.
There are a few things this sounds like to me. One is a bad rpm sensor in the transmission, which is part of what is called the "conductor plate". If this is what it ends up being, there are a few update parts which should be installed, but they don't get done "automatically", so let me know if this is the case and I'll fill you in.
Another possiblity on a 98 would be a part in the shifter called the "range recognition switch", these can both cause various complaints similar to what you have going on.

Gilly