1989 765T, w/69k mile '94 B230FT engine, LH2.2

Took the car for it's safety/emissions check today and it failed for high Nox.

HC Read: 1.75 Limit: 2.25
CO Read: 21.08 Limit: 23.74
Nox Read: 5.72 Limit: 3.25

I understand that NOx is formed when combustion temperatures are too high, the Nitrogen in the air combines with unused Oxygen to form the NOx.

Some background:
Car has 130k miles on chassis, the old engine cooked itself from loss of coolant through, I believe, the heater valve...bad enough that piston #1 melted. Passed emissions (old engine) in MAY 2004. Assumption: cat converter is/was doing its job in recent history. How long can an untuned engine run before killing the cat converter?

I recently finished the engine transplant (500 miles ago) and the car runs like a champ now. Upon reassembly I was very meticulous with regards to putting everything back together properly, timing is spot on. Also replaced all the vacuum hoses with Volvo hose ($$ but very high quality). I checked for vacuum leaks around the intake and most all other connections, no change in idle speed. Assuming no leaks but will dig alot deeper over the weekend.

The O2 sensor that I am currently running with was the original that was involved with the overheat, could be contaminated with coolant and oil...I should assume that it is. Anyhow, I figured since the car was running well with mileage that is comparable to my wife's '94 945T (same driving conditions) the O2 sensor was doing its job.

Today I checked the O2 sensor voltage:
* Took the car for a good 10 min highway drive
* Immediately measured sensor output voltage at home.
* Voltage reading a constant 0.85 - 0.90 volts
* Pulled and plugged vac hose from FPR (rich), no real response.
* Introduced vac leak from intake, no real response (I don't remember the numbers as they were far from what it should be.)

Now my theory/question:
If the O2 sensor voltage is at a constant ~0.85v (rich reading) this should instruct the ECU to reduce the amount of gas to be injected? Yet, the same amount of air would still be entering the engine which would make the system lean therefore causing the high NOx. Is my logic correct?

One line in the FAQ that caught my attention, the "no-switching" part describes what my sensor is doing:

"Leaking fuel pressure regulators or leaking vacuum hoses and intake gaskets often will cause a "no-switching" condition at the oxygen sensor."

I don't think that any of the above is bad but will check all of these things over the weekend as well as replace the O2 sensor with a universal Bosch (#13913 or 13953) for the Ford 5.0 V8, cheap enough for peace of mind.

What do ya'll think?

Thanks in advance for your help.
Bean
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'80 242GT 93k, '94 945T 142k, '89 765T 69k (new '94 B230FT)