Its quite an interesting mode of operating actually. Left to its own devices, the gearbox will be a 1-speed hydraulic automatic, with P, R, N and D (3rd / 4th depending on model). The TCU actually overrides this behaviour by controlling the solenoids in the valve body, and monitors the results via the input and output speed sensors.
"Just wondering how/if the TCU knows when the gearbox is in First gear"
The valve body does only have PRND, so the TCU sees 'D' on the F125, and based on its numerous inputs it will select 1st using the solenoids. It doesn't know a gear has been successfully engaged until it sees some output revolutions, and it knows the gear ratios so it can calculate what the output speed should be based on the input speed.
When the TCU detects a fault (such as input rpms happen but output rpms don't) it basically shuts down and leaves the gearbox to its own devices and it reverts to the 1-speed auto, which is how limp mode works.
"I don't imagine the developers ever considered providing cross-compatibility either way between FL1 and FL2 TCUs and FL2 and FL1 clusters! "
The FL2 cluster is backwards compatible to PRND432 as not all FL2 had S mode, but its fair enough the FL1 cluster isn't forwards compatible
