The decoder is installed and the LGB 2-4-0 is working fully to my expectations.
First I cut and ignored the two outer wires which are from the circuit board to the motor.
Then I soldered one pair of wires to the pins I cut the motor wires from (these new wires will power the motor from the decoder).
Next I soldered another pair of wires on top of the inner pins which will feed track power to the decoder. I left the circuit board connected because I want the circuit board to power the lights and smoke unit.
Then I fed the two pairs of wires to the front of the loco because I will place the decoder in the smoke box.
Finally I reassembled the loco and tested it. Everything worked as expected.
The LGB analog sound unit works with the Koopmann circuit and a Digitrax DH123D decoder - both under analog track power and under MTS/DCC.
The LGB 2-4-0 loco runs under both analog track power and under MTS/DCC.
The only negative issues I've noticed that might concern some people is that while the lights work perfectly under analog track power, when under MTS the headlight stays on all the time and the tender light never comes on. Also the loco (under MTS) is a bit jerky as it goes through the speed steps. Some day I may try to tune this up (it may be programming or it may just be because I used a cheap Digitrax DG583S decoder).
I have to say that I am very satisfied with my results. Since I already owned the 2-4-0 and the LGB 4135s sound unit, my total expenses to convert this loco and sound system to MTS/DCC was just about $75 including both Digitrax decoders and the Koopmann circuit.
Of course there are far better decoders and sound systems to have done this with but my objective was plain and simple - to see just how cheaply I could convert this loco and sound system to MTS/DCC. The difference is that (because of the cheap overall cost) I may now convert my other eight LGB 2-4-0's so they too can run under MTS/DCC. If I had used better decoders and/or sound systems I would never have considered converting these locos to MTS/DCC.
Next will be the testing stage to see how well everything holds up and performs as I put some hours on the loco.