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These transmissions are completely mechanical. Torque converter lockup occurs when governor pressure reaches approx 50 psi. Governor pressure is generated by the rotation of the output shaft, and is also responsible for initiating shifts. So if your car is shifting correctly (I'm assuming it is) then governor pressure obviously is being generated. So there could be something wrong in the valve body which is preventing governor pressure (generated at the back of the transmission) from reaching the torque converter (located at the front of the tranmission). There could also be something wrong with the torque converter itself.
The volvo green book for automatic transmissions has EXCELLENT troubleshooting diagrams for very specific problems. I don't have the greenbook for the "L" series of transmissions, but I've seen the 240 green book for the base BW55/AW70/AW71. I'd try to find the 740 green book for AW70L/AW71L and see what it says. Maybe someone on the board has it and can look for this specific problem for you.
Good luck!
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Matt L. Cary, NC two '89 740 sedans
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