Hello Ray,

I fixed the 'OD solenoid problem' today. Thought I should share with you and others how I did it:
1) Drain ATF
2) Use a 12 mm wrench to remove the OD solenoid located on the left of the transmission. Then remove the OD solenoid from the electrical circuit.
3) To check whether the OD solenoid is working, clogged up etc, rehook the OD solenoid to the electrical circuit. Turn the ignition to position II and make sure the 'arrow' light on the instrument cluster is off. Pick up the OD solenoid from where you left it and ground it to the chassis to switch the OD on and off. I used the aluminum transmission pan. Did that and heard a muffled click, so I blasted WD40 through the two fluid ports of the OD solenoid until everything was flowing freely when the solenoid was energized. When de-energized, nothing should flow. So my OD solenoid was ok at this point.
4) Before I re-attached the OD solenoid to the transmission, I checked the mating surfaces on the transmission with my fingers for dirt. To my surprise, I found tiny pebbles, crud, and black pieces of unknown origin in the large fluid port on the transmission! Ideally, one should then use a vacuum of some sort to 'suck' out all the stuff out, but since I didn't have one at that point of time, I used some electrical tape to 'stick' all the 'particles' out. I think all that dirt went in when the car was serviced by the previous owner(apparently regularly at a Volvo dealer)!!
5) Re-attached the OD solenoid and ATF drain pan plug.
6) Filled transmission with 2.8 quarts of ATF. Crossed my fingers and went for a drive. It finally shifted from 3rd to 4th. I was estatic.

However, I'm still worried that my transmission will run into problems later since now I know that dirt has gone into my transmission and I'm sure I didn't remove all of them.

I hope you have had luck fixing your overdrive.

Cheers,
Yen

ps. If you've gotten a tach, here are the readings that you should be getting:
3500 rpm for 70 mph on 3rd.
2500 rpm for 70 mph on 4th.