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Did you see the 'Cat bypass pipe' thread in the 700 forum? I thought of your situation when I read that... Here's a link to the thread, and here's one post that has a good method of removing the cat without messing with your rusty flange bolts:
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You may be able to cut the converter right after the flange joint using a hacksaw or Sawsall. Then find a pipe that slipfits on the remaining stub (or cut the downpipe and lose the flange flex joint). If worse comes to worse, you may have to have a shop expand a pipe slightly to make a perfect fit. Seal it with exhaust paste and a clamp. Same deal at the other end. Alternatively, band clamps are more expensive but can allow you to work with off the shelf pipe diameters. There are also a variety of adapter pipe sections available. Doing exhaust work right takes time and patience. You could also buy a new 2.5 inch converter for about $70 and have pretty good flow. It would be aftermarket (Summit and JC Whitney sell Walker and Catco for under $100 in 2.5) and you would have to do some adapting to fit.
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You might also take one more stab at getting backpressure info from someone here with the Volvo green manuals. I would post in the 700 forum, and title the post something like "Green Manual info needed." There are a few BB'ers out there with complete sets, and I'd be shocked if the turbo/exhaust sections in those books didn't have something about backpressure.
Probably not a bad idea to try dino 10W40 for a bit... even if that keeps disappearing, it's less $$$ down the tubes, so to speak!
Best of luck to you,
Brian
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