I just went through this with my 1989 260e. HC was a little high over the limit and the CO was 6% instead of 1%. The mechanic dialed back the fuel mixture and then the HC was OK but the CO was a 2%. Still failed. Also, by dialing back the fuel mixture this caused some unstable idling and starting.

I used Guaranteed to Pass and the HC went down to a few ppm over zero and the CO dropped to zero. Go buy a $8 bottle of Guaranteed to Pass instead of a new O2 sensor and exhaust system.