Hello John,
Sorry I did not get back to you until now, I had a late night (morning...actually) engine project that didn't get me to bed until almost 10 AM this morning. I just tried calling, got your voicemail. I am E-Mailing, PM'ing, and Posting this info.
To Answer your question:
You were correct in your second assumption, The Factory Upstream O2's (header O2's) must stay in place. The O2 simulators are for the O2's behind the Cats. However, Plugging an AFR system into a **** behind a cat will never give "true" results. I highly recommend having a shop, or if you can do it yourself, install a new O2 **** into the upstream (before cat) section of the exhaust. Depending on what exhaust you have, dictates where you could mount it, anywhere before the Cats would be fine. Right along side or opposite the factory upstream O2's would be optimal. However, if you have headers with an O2 mounted in a single cylinder, after the collector would be optimal. You want it to read all 5 cylinders.
Hope that helped.
Thanks,