Braineack speaks the truth.
The way this works is that the CPU does an 8 bit A/D conversion on the incoming signal, scaled as 0-5v, and returns a number from 0 to 255. It then refers to a table of conversion values that was generated during the EasyTherming process to correlate this to a temp value. This same table is also written out to thermfactor.inc (for MegaTune to use) and so you can see what's going on. Here's an excerpt:
ADC Temp, degF
0 Sensor Failure - use 170 degF as default
255 Sensor Failure - use 170 degF as default
As you can see, when the returned value is either fully high or fully low, the MS assumes that the sensor has failed either open or short, and thus plugs in 170° as an error indicator, and to provide a value to the code that'll at least keep things running in a semi-normal state (eg: not in warmup, not in overheat). Thus, you are correct as to why it no longer worked when you removed R7 and tested on the stim, as there was no longer a pullup. Now, however, it should be working. But the MS is seeing either +5v or 0v on its CLT sensor input, and thus throwing this fault.
For starters, turn everything on and use a voltmeter to measure the junction of R8-C6, relative to ground. (R8 is right below R7). Depending upon the temperature of the engine, you should see something in the 2-3 volt range.
If you see this, then you'll need to dig further into the MS itself.
If you see 0, then try unplugging the MS and making the same measurement directly at pin 21 of the DB37. Fixed? You've got a short in the MS. Still nothing? You've got a bad sensor, bad wiring, etc.
If you saw +5v (or very close to it) at any of these places, then your CLT sensor is either disconnected or failed open. On your '97, the CLT sensor line passes through Common Connector X14 (under the hood) which if I recall correctly is the disconnect point for the injector harness.