I also have tried to get the OBD2-simulator to work. I have made a simple breadboard version for the KWP2000 protocols. When I dont connect anything to pin 27 and 28 on the processor, the inputs will be 5V and then the KWP2000 Fast init protocol works.
But when I ground pin 27 to select the KWP2000 5bd init protocol, it fails. Then I think I get the same error as you do. The two LEDs blink alternately twice at about one second rate!
ON TO SOMETHING...
Now I have come a little further...
To be able to use other protocols than the default KWP2000 Fast init you have to connect to the simulator with the KWP2000 Fast init protocol and make changes using the MiniSimConfig_EN.exe program included in the free software kit 080804-11.zip from Elektor.
Since I have an OBD-II Bluetooth Interface dongle that works fine with the default protocol I have tried to connect from a PC. I start the MiniSimConfig program and see the grayed out KWP SLOW, ISO and PWM checkboxes for the missing protocols. I select the paired COM-Port number and press CONNECT. The program connects and I get data from the Interface: ELM327 v1.5, Minisim: AGV-MINI-SIM V1.3 12345-67890-123, but then an error message pops up: AGV-ERROR, Error in communication D1503000... How close can you get?
Since I could not find the correct transistor, I modified the K-Line circuit by changing T2 to 2N7000 with a 1k5 resistor to the gate and added a 5V pull up resistor of 10k to pin 5 on the processor. By the way it seems that the LEDs are turned the wrong way in the Elektor schematic Figure 1.