Very helpful, thanks for the replies. I have always loved this body style of the XC70. Will give this more thought. Again, thanks for the input!

So, when the fluid gets hot it shifts hard or is it slow to shift? Big difference. The ATF has probably never been flushed, it is not a dealer maintenance item. You could gamble and hope that a software update and flush fixes it.

Most likely, it will get worse and not better. Finding an 05 in a junk yard does not guarantee anything. Then you will have spent good money on a tranny plus about 8 hours of labor to replace it. Is it worth it?

--
Keeping it running is better than buying new

OK....here`s my experience & others, notably Klaus, will weigh in with actual technical advice.
We have two XC70`s, one is an `03 & the other an `04. My wife drove the `03 for a number of years as a commuter with 60/40 ratio of highway/city driving. A little over a year ago the `03 began to experience "tranny flare" in city traffic with 160K mileage. Slipping from 1st into 2nd & later, 2nd to 3rd.
We tried the B4 servo cover 'remedy" from IPD & flushed the tranny fluid(Toyota Type IV), of course. The issue was much improved for about two months but came back again. We are just about to replace the B4 again with the thought that the local shop which did the repair has no experience with Volvo`s & I`ve since had a negative experience there with my GMC truck. Maybe they are just borderline competent!
Last Summer we bought the `04 from a friend....It has 200K on it & no tranny issues so far. The only problem we have had was the CEM which went "south" recently & the people at Xemodex told me that is a common issue on `04`s. We did do some front end work on the car but we were aware of that going into the deal & my friend factored that into the price.
Have you checked into a transmission software update for that year. It seems that tranny issues were resolved by `04 from what I`ve read.
In general, our XC70`s have been excellent cars & we have no regrets.
Good luck!
Rich