Hi Pharmman, I did the brakes on my S80 a few months ago and had the same problem you describe in virtually every detail. I can almost (I say almost) gaurantee you that your problem is that you have the spring on the wrong side of the metal boss on the caliper. I'm a competent mechanic and have replaced probably hundereds of pads and shoes. When I did mine I thought I paid close attention to the way the spring went. I even did one side at a time as always, so i can compare if something doesn't seem right. But it went so "obvious" that I never had to look at the other side (so I thought). Same spongy pedal, etc. I checked and re-checked, used a power bleeder etc. I even was beginning to think I blew a seal in the master when pushed the pistons back. Anyway, I came here or maybe it was another volvo site (but I think it was here) like you, to find if anyone else had a similar problem. Someone gave the URL of an S80 brake how-to with a mention of the spring. The site had photos showing the proper spring installation, and sure enough I had the spring on the wrong side of the boss. I put them on right and the problem was immediately solved.

If I have time and I can find the place with the how-to I'll post it.