yes, for the time being I want to use the stock CT-26 DP w/ stock cat. Eventually moving to either a 2.5" downpipe mated to a 2.5" exhaust. or a 3" downpipe mated to a 3" exhaust. (I haven't decided which yet.) And I was probably going to with something like a magnaflow high-flow cat under the car. but, since on the aftermarket DP it will already have 2 O2 sensor bungs I would probably just use those two.

so, you're saying I should wire the second o2 sensor way down like where hurley's 2nd one is?

Personally, I would recommend a 3".
Especially with FWD.

Yes, if you mount it in the DP before the cat it will set a code.

Your cat changes [catalyzes] the stuff in your exhaust to different amounts, and creates some new ones.
One of the effects is it smooths out the rich/lean.
That is what your ECU is looking for to ensure the cat is working right.
If it sees rich/lean on the 2nd sensor it will set a code.
For OBDII it's PO420. I don't know off the top of my head if you will only get an O2 sensor code, or if you will get a specific code for the 2nd sensor.

You will probably have to extend your wiring to do this.
I suggest you solder it well. This will help prevent that code in the future [less chance of the connection becoming bad].
Also, protect the wires well. Keep them away from the exhaust pipe and cover with some type of tubing.

just FYI, ive had my 2nd O2 sensor installed in the lower part of my DP (no cat) for almost 2 years now.
ive never had a problem with it throwing codes.
i think i MAY have gotten one, maybe once..lol
(i've had a problem with the wiring for my wideband, which sends a signal to the ecu to replicate the 2nd o2 sensor, but that is a seperate issue that has to do with the plug on my wideband controller, not the ecu or o2 sensor working)
imo the OBDI setup is not as strict on what it requires as far as values from the 2nd o2 as say a OBDII or newer ecu that REQUIRES that thing be placed just so and working PERFECTLY for it not to set a hard code.
also, on our cars, with the cali setup, the 2nd o2 sensor code works on what toyota calls a "two trip detection logic"
basicly, the problem happens, the ecu stores it in memory, but dont throw a code, untill you shut the car off, and start it again, and it sees the same problem again.
also, it will only throw the code when your @ WOT for 2 seconds or more.

I stand corrected.
Apparently the 94/95 O2 sensors are monitored differently than the 96^.

FYI, there are a couple of sensors that use 2TDL. Same goes for OBDII.
And if it doesn't see the problem for 3 consecutive trips, the light goes off.
It will still hold the code in memory though.