If the duty cycle reading is as I described, then all should be well with the lambda system. I like to look at the O2 sensor output to make sure it has a nice, crisp jump between the high and low voltage readings within the specifed frequency range, however this test is not prescribed by the Mercedes diagnostic procedure, and it not actually necessary if the duty cycle behavior is within accepatable limits.

Given your CO readings, I don't see anything wrong with your catalyst. These KE-equipped engines are usually higher on HC than other fuel system designs for possible reasons that I've outlined in other posts and is probably one reason why it was eventually abandoned for a pure electronic system with solenoid injectors.

In California and other state emission tests, many KE-equipped engines are just squeaking by due to high HC and many have marginal failures. Further details at:

http://www.peachparts.com/shopforum/showthread.php?p=833484#post833484

Duke