Here is a fairly decent link regarding the operation of a torque converter. It does a good job covering the basics in what should be fairly easy to understand language.

http://auto.howstuffworks.com/torque-converter.htm

If I remember correctly, it also has some decent animation that will show you what's happening when the auto-tranny shifts as well.

As for the power loss after shifting to third, it depends. Is there any stumbling or shuddering of the tranny?

Dutch