Overdrive would be the 4th gear in the transmission. So when the overdrive is off the transmission only uses the 3 gears. It is similar to the 5th gear in manual transmission and that is for fuel efficiency (for example; it is a cruising gear).
The 2003 Mustang
models use the 4R70W transmission which is an updated version of the AOD/AODE (AOD/E) transmission.
4 - # of gears
R - R
ear Wheel Drive
70 - arbitrary number assigned by Ford to the transmission
W - W
ide gear ratio*
*the wider gear is for the 1st and 2nd gear compared to the AOD/E.
-1st gear: 2.84:1 (2.40:1 in the AOD/E)
-2nd gear: 1.55:1 (1.47:1 in the AOD/E)
-3rd gear: 1.00:1 [Notice how in the 5-speed manual transmissions the one-to-one gear ratio is 4th gear]
-Overdrive (4th Gear): 0.70:1
For comparison the Borg-Warner T5* gear ratios:
1st gear: 3.35:1
3rd gear: 1.33:1
4th gear: 1.00:1 [here is the one-to-one gear]
5th gear: 0.68:1 [this is the "cruising" gear]
*Numbers taken from Transmission Technologies Corp.
and may not be 100% accurate (but may be close to the correct gear ratios, depending on vehicle specification).