With the O2 sensor connected, the bike will adjust injector signals to obtain a 14.7:1 air:fuel ratio during certain conditions, such as steady cruising, idling, etc. The fact that the PCIII is also adjusting those signals doesn't matter, because the PCIII adjusts them by a fixed amount no matter what, but the bike's ECU uses feedback from the O2 sensor to decide how to adjust the injector signals. This is called "closed loop" mode because of this feedback loop.
You will only enjoy the PCIII's adjustments when the bike is not in closed loop mode (aka, "open loop" - the ECU uses various environmental sensors and lookup tables to determine how much fuel to provide, but does not directly measure the results to make further adjustments; no feedback loop). If the O2 sensor is plugged in, this will mainly be during acceleration, and probably at high RPMs.
Some people choose to leave the O2 sensor plugged in because they like the better fuel economy of the closed loop mode. If you want to experience the PCIII fully as intended, then unplug the O2 sensor. It will probably improve any little bit of hesitation/surging that you are experiencing now. Of course, doing so will likely decrease your fuel mileage a bit.
Maybe someone else can answer the question about wire colors.