VIK,
My understanding is that the problem starts in the valvebody (there are modified valvebodies available) causing the solenoid operated valves to stick or bind causing slow activation. This sticking will often dmage the solenoid and cause the solenoid to weaken or completely malfunction. So the initial problem is caused by the valvebody, but it can also involve bad solenoids.
The transmission also contains several sensors that detect the rotational speed of some of the sun-gear sets and is designed to ensure certain gears are disengaged before engaging the next gear. When the sensor for second gear does not detect it has been disengaged because the solenoid is sticking or weak, it will not shift into third gear until it detects that 2nd gear has disengaged. Because the solenoid is partially engaged or slow to activate, or release, the bands and clutches are not locked with full pressure and the transmission slips.
You may detect the 2-3 shift flare before the sensor detects the shift delay and causes a blinking O/D light indicating an problem was detected with the transmission.
These problems existed in the earlier 4 speed O/D version of this same transmission and Ford added the gear speed sensors to detect the problem when they designed the 5 speed O/D electronic transmission used in the Explorers and Sport Trac's. So Ford is vary aware of the problem, they just figure that most of the transmissions will last at least 36K miles and that will get them through the standard warranty period.
I think around 2003 they may have changed to the new improved valvebody which has reduced the number of incidents of the 2-3 shift flare, but it still occurs.
...Rich