I hate to say it, but it sounds like you have a seal inside the transmission going bad.  No matter what the shifting does, it should not kick out of gear during cruising.  Once it's in gear it should either stay in gear or shift to another gear, not just quick working.
When you manually down shift, the line pressure goes up in the trans.  The extra pressure could cause a weak seal to hold tighter due to the pressure increase, and hold in place for a while.

The modulator does affect line pressure.  As vacuum drops, the line pressure goes up.  This is to hold the friction material tighter inplace, so the increased torque from the engine won't make the trans slip under extra load.  The line pressure is not up all the time so the trans shifts easier under light load, and the seals last longer with the lighter pressure.

It could be related to a fluid pressure problem due to the filter.  So I would still start with changing the fluid and filter, and crossing my fingers.

Crossing my fingers..

The auto hobby shop on base is open tomorrow, so I'll drive it in after work and tear into it.  Bought the modualtor and filter today.  Rebuilt 350 tranny from a place like the zone is around 450.00 or so....  Since I don't have a garage I have to do the job myself in a day...otherwise I might try a rebuild kit myself...

JimG38425.6084722222

I have to agree with Ken, Jim. It sounds like a bigger problem than just a minor repair. What you are describing is what we call 'neutralizing'. What happens is, either there is not enough fluid in the unit to keep it in gear, which you have checked, or not enough pressure to keep the clutches applied. The problem is, either scenario is bad. A 350 ( or any 3 spd. auto) uses the most volume of fluid in high gear. The forward and direct clutch-packs are applied, which takes most of the fluid available from the pan. If, for any reason, there is not enough fluid to apply both clutch-packs, then the high-gear (direct) clutches will start slipping first. If the problem is not corrected soon enough, then you'll wind up with the forward clutches slipping, also. It is possible that a fluid/filter change will get you back on the road, but I'm afraid the damage is already done, at this point. By all means, you should drain the fluid, and take the pan off, and check for excessive poo-poo in the pan. ALL automatic trannys shed metallic particles, and a small amount of friction material, but you have to determine if it's too much. If you have a 1/4" thick pile-o-crap in the bottom of the pan, I don't think a filter change is gonna do much good.
Sorry, I had to post & edit to keep from getting kicked off for being 'idle' too long Anyway, I was saying, I think the damage is done. Go ahead and change the filter & fluid, and we'll keep our fingers crossed Make sure you do NOT use a 'Dacron' style filter. 'Dacron' is sorta like a felt style filter, and they have a tendecy to stop up REALLY quick, especially if there is any crap in the unit already. Make sure the filter you get is a 'screen' type, either brass or plastic. These are the only ones I use, and if they ever stop up, you gots more problems than a filter will solve, anyway! Good luck, and if I can help more, PM me, and I'll do what I can.
I believe your problem is going to be a stopped up filter, which is causing a restriction in the fluid flow to and from the pump, which will cause the clutches to slip. As an experiment, take the vaccuum line off of the modulator and drive it. It will shift late and hard, but it will shift manually. If the 'neutral' condition goes away, then you might get away with a fluid/filter change, and change the modulator, also. Just a quick test to see if the mod. is actually causing the prob.    Adams' Apple38425.8644791667

 If I do have to install a new or rebuilt tranny, any thoughts on where I should get it? 

Or should I put an OD Tranny in? 

I've been reading up and I know if I do install a OD model, I'll have to shorten the drive shaft. Cutting and welding drive shafts concerns me...should it?

Thanks for all your advice.

the easiest thing is to get a kit from bowtie overdrives and just replace your drive shaft

replacing a 350 with anything other than an overdrive in the modern day is futile..

[QUOTE=cthulhu]

the easiest thing is to get a kit from bowtie overdrives and just replace your drive shaft

replacing a 350 with anything other than an overdrive in the modern day is futile..

[/QUOTE]

 Replace it with ....???  Or do I take the one I have and have it cut and welded...  or is it part of the kit?

There are many places to have a drive shaft cut and rebuilt.  I don't know about your area, but through some shipping it should not be a problem.

The least expensive way it to just rebuild the 350, or have it done.  A conversion will cost more.  But the advantage of a conversion cannot be overlooked.  An over drive transmission will increase fuel mileage, and save wear and tear on the engine.  The 200r4 and 700r4 are both good options.  When the 200r4 first came out, it was a problem.  But there are a lot of upgrades from that time, and they hold up well now.

If you are going to do the upgrade based on the saving of fuel vs the cost, you will need to drive a LONG time to break even.  Maybe 80,000 based on another members est. (sorry I don't remember who).

Of course, you could also go to a higher numerical rear gear ratio and still improve fuel mileage while increasing your acelleration and launch quite a bit.  But alas, all more cash.

If time and money are the stronger factors, you can just go to a local transmission shop with a good rep and have the car back the same or next day.

Thanks everyone...

 I decided to do the trouble shooting tomorrow (my day off) and then go from there. I'll let you know how it turns out. Went and got the filter and I've had the modulator.

 Someone mentioned maybe a governor could be a cause...?  If anyone has any more advice, I'll be here all day.... well most of it.

 Thanks all !

 Jim

 

both aftershark and i have done an overdrive fuel cost savings calculation and posted it within the last 6 months..  aftershark gave a best case and i think he came up with 60 thousand miles..  I gave a more realistic case and came up with around 85... although the way gas prices keep going up it may be less now..

going from a 350 to a 200r4 is a very easy swap..  ask redwingvette.. he did this. and if I remember right i think it may be the the same overall length and may not require a shorter driveshaft.

i dont remember if it's the same length as a long or short tail housing th350?

btw..  to illustrate the bottom end improvement..  a 200/700r4 with 3.08 gears launches like a th350 with 3.70 gears.  meaning better accleration at the bottom end and lower cruising rpm (less noise, less wear, less heat, better mileage) at the top... addressing some of the biggest problems in driving a corvette..

cthulhu38426.7235069444