Dave, you can read bruno's writeup on how to fix, or else it's time to purchase a new unit.
They are on the left hand side of the car, near the brake booster. It's pretty easy to remove and replace. I think 3 coolant hoses go to the heater valves, not to sure, the heater pump is underneath it. I'm running without one at the moment.
http://www.bmwe34.net/e34main/Mainte...eaterValve.htm