What do you guys think?

Sounds to me like a band is applying while in third. Probably the front band as the rear band applying would be reverse and probably much more violent.

The front band is second gear only along with the rear clutches. The rear clutches are applied in all forward gears so they aren't your problem. Third gear requires the application of the front clutches and release of the front band. If the band isn't releasing then the trans is trying to lock up in two gears at once. The fact that you held it in second and didn't get the condition tells me front band apply/release issues are the cause. Why? I don't know.
The most likely scenario is the valve body modification though. Try throwing a stock valve body in there and see if the problem goes away.