The transmission does not seem to have any serious problem and the issues apparently were done purposely to simulate a shift kit. The shift point does not seem to be raised because it shifts at a relatively low speed around 25 mph. The owner just shifted it manually all the time to get a higher speed shift point.
It sounds like the modulator may have been adjusted to get this effect and it sounds like that is reversible. I suspect the kick down linkage(cable?) has been disconnected also (or adjusted out far enough to not be effective) and that should be easily fixable if the components are still there. I suspect the vacuum to the modulator may not be connected also but that should be easy to fix.
Yes, I realize the low gear is low enough that it should not engage at highway speeds. It should, however, kick down at speed below 40 mph to help get that 260 get moving.
Any good references to anyone in the Orange Co., CA area that is familiar with these transmissions and would take a look to see what may be out of normal in this transmission and set it right? My friend has no problem paying for quality work. I can check out the kick down linkage and vacuum to the modulator but don't feel comfortable breaking into the trans.