DS1 only goes to the external floppy port.
So you need to tap it and feed it into pin 12 of the ribbon cable. DS1 is generated from pin19 of the YM chip (U302). Consider doing this under the motherboard as you can then use a standard PeeeeCeee floppy ribbon to hook everything up. I've seen people hacking ribbon cables to do this before and use a clip to hook up to the leg on U302, not a great long term plan as mild corrosion will affect the reliability given time.
If you are using a ribbon cable with a 'twist', then:
Set HxC to respond to DS0 and connect it to the normal connector.
Don't touch your internal drive, just hook it to the DS-swapped connector.
If your ribbon doesn't have the 'twist ':
Set you internal drive to respond to DS1 and HxC to DS0. Connect them up however you like.
STE: Desktopper case, IDE interface, UltraSatan (8GB + 512Mb) + HXC floppy emulator. Plus some STE's/STFM's