You can order the new lock cylinder from your dealer (or one of the online ones like Tasca that offer better pricing). You give them your VIN and they order you a new cylinder from Valeo in Germany.

I decided to drill mine out (I couldn't get the key in the ignition and I needed the car). If you remove the cover on the bottom of the steering column you will see a small cadmium plated metal square in the middle of the pot metal assembly. It is held in place by peening over the pot metal. Just drill out those points and the square will pop out, a spring will fall out, as will a small piece of the "guillotine" that locks the ignition. After that the steering lock won't work anymore, but the key will go in and out with ease. There are some pictures of this process over at Matthew's Volvo Site.

If you want to replace the lock cylinder, but want to use the car in the meanwhile, you can take the electrical portion of the ignition switch off the column and use a small flat blade screwdriver to start the car.

Good luck!

This is somewhat dated as Waltrip no longer ships out of state, but worth reading non-the less. Even Tasca volvo might have the correct parts for cheaper than normal dealers...

http://www.matthewsvolvosite.com/forums/viewtopic.php?f=1&t=34472

Read the responses also.
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My name is Klaus and I am a V♂lv♂holic

Replacement locks are a dealer only item and need to be ordered. The old keys will fit along with one new key. No programming needed as far as I know.

The lock is installed with break-off screws. The old way was to drill out the screws(2) which was very time consuming. I came across a method that involved a punch and hammer to back the screw out which appeared to be much easier and faster. Steering wheel stays in place.

Because all of the write ups refer to 2002 and older cars, check with the dealer first. Just call the parts dept, not the service 'advisors'.

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My name is Klaus and I am a V♂lv♂holic