You need to replace or re-align the transmission range sensor (TRS). It is basically a multi position switch located on the front of the transaxle right where the shift position lever is.
The trans will still work with a malfunctioning TRS. There is a manual control (valvebody manual valve) for the main gear selections P,R,D. There are actually only three different hydraulic circuit selections with the manual valve. P/N (uses the same), R , and D (includes manual 1st and 2nd).
1st gear won't engage because that selection is controlled by the switch only. 2nd selection is also controlled by the TRS and not the manual valve.
There are two bolts that hold the sensor to the transaxle case. Very easy to replace with only one jack slightly lifting up the driver side. The holes in the TRS are slotted to allow for adjustment. Usually adjustment is only need when installing a new sensor, or the old one was knocked loose.
They usually malfunction from moisture and contamination, like any sensor or switch.
To align the range sensor, you should use the specialty tool (OTC 317-415), but it is not necessary if you are paying close attention.
That rectangular end of the manual control rod fits the lever with ball end for the shift cable to attach. Behind the lever, where the TRS is, the rod is round with a slot that is keyed for the TRS (like the Zetec crank pulley). You want to match TRS key with the rod slot then slide the TRS down into place.
Before you tighten the TRS bolt down, align it like in the picture. I never really needed to use the alignment tool, I just "feel" the switches position while it is still loose on the rod, eyeball it and tighten it down.
I forgot one important tip:
ALWAYS HOLD THE MANUAL CONTROL LEVER WHEN TIGHTENING OR LOOSENING ITS BOLT- OR DAMAGE WILL OCCUR.