<<Q: When I shorted pins 30 and 87 on the K38 (starter alarm relay behind the instrument cluster) it appears that I also bypassed the NSS according to the ignition schematic that I have attached. Is this correct? >>

Incorrect..
Look at the schematic and you will see the chain of power flow. It is ign sw. ,to K38, , to NSS, to starter sol.
You have simply jumpered the K38 part of the chain. This is a series circuit and you have just jumpered one part of it.
You will notice in the right side of the schematic that the CDN versions simply do what you have done cuz they do not have ATA.
What you want to do is jumper R50 an 50 at NSS... or look there for power from ignition start switch..

So how come when i replaced the K38 I still have the same problem? As I said, I checked the starter=good, replaced the K38 (after shorting the 2 pins - then the car started). Is it possible that I just got a bad K38 from Fastlane? Is there any way to test the relay in an electronics lab with a power suply and a multimeter?

It sounds like I'm ok driving with the pins of the relay shorted as the CAN versions didn't have this relay in place.

I don't know if this is related, but it seems as though my flasher relay has died at the same time as the car not starting. It is making a soft buzzing noise that goes away when my turn signals are on. Anyway, probably unrelated, just thought i should mention it.

Question:
DO you have an after market alarm system? I had the same problem on my 95 e320. Gauges went dead while driving, then wouldn't start. Buzzing from relay. I had the after market security system yanked out and haven't had a problem since. It has been months. You might try searching for my thread I think it was "car dead in driveway".

No, I have no aftermarket security system

<<So how come when i replaced the K38 I still have the same problem?>>

As I said , you do not have a K38 relay problem, as you have jumpered the relay out of the circuit. [ just as the CND in the schematic]

...back to the schematic.
You know the starter circuit if fine after the K38 and NSS cuz you brought power to the terminal next to booster.
So , working back, from there , you have to go through the NSS [ that is why i told you to jumper the NSS]
From there , you already know you have by-passed the K38 circuit, so it is possible that there is no feed from the ignition sw. [ that is why I mentioned that possibility to you ] That is another simple voltage test at NSS feed line 50...
It is all right there in the wiring diagram you posted.

Ok, i'm sorry for being such an idiot at this electronics stuff. I'll troubleshoot the NSS later tonight hopefully. I just thought that shorting the wires on the K38 pointed to it being the cause of the problem, not ruling it out. Thanks for your help.

Quitre all right..

A good trick for a diyer when working with a schematic circuit like yours is to print the page , then go to the feed at the starter with a hi-liner pen and trace back the circuit through all the series of parts, back to ignition start switch.
that will show you the chain needed to diagnose the break in the circuit causing the problem....