First time I had that on an '88 Bronco II, I wound up putting a new slave cylinder in. This was caused by a cracked lid on the reservior, which allowed dirt in. Flushed out all the old fluid and put a new reservior on - which was pretty easy compared to getting the transmission out to change the slave cylinder.
From the reservior, a hose runs down to the master cylinder and from there to the quick connect fitting at the driver's side of the bell housing. Good luck!