The intermediate (2nd gear) clutches are in the front of the case, right behind the pump. The clutch pack engages the case on the outside, and the intermediate sprag outer race on the inside. The intermediate sprag assembly, consisting of an inner race, a roller clutch sprag, and an outer race, is located on the direct (3rd gear) drum. It is the weakest part of a 350 turbo transmission. Most often, if you have a sudden failure in second gear, the sprag is broken. Usually, it won't slip, you just don't have 2nd gear at all. It is possible you have blown a lip seal or cracked a piston, but a sprag failure is most common. Rarely, you find that a constant excessively harsh 1-2 shift will cause the splines on the inside of the clutches to strip.
The weakness of the intermediate clutch in a 350 is why I rarely suggest it be used in a performance application, because to make it strong enough costs about $450. A 350 is best replaced once you begin breaking sprags. Greg's company, TCI, does make an outer race that is heat treated, and gives an affordable improvement, but it will not make a 350 nearly as strong as it needs to be in many cases.