I have no future plans to have that type of train or the project you just achieved.
I haven't actually achieved it yet, but it's coming along. However, you never know what you can achieve if you try, jump into the pool, the water's fine. 
Does it matter which side of the circuit the diode is installed on?
Not at all, just as long as it's pointed in the correct direction. The anode (without the stripe) points to the source of positive voltage, in the case of the lighting circuits, that's frame ground.
What will you use for sound? I didn't think there were any RS boards with the sound of small diesel motors. Also re the S gauge couplers, American Flyer couplers are close to the size of Lionel, although you might have to file the knuckle for smooth operation.
I'm planning on using the Alco PA sound set, of all the ones available for the ERR RS Commander, that's the best in my mind. You're right, there are no "small" diesel sounds, so that will have to do. I toyed with the idea of trying to graft the stock sound board in, but getting that to run in command would be a major development project.
I haven't considered the AF couplers, but that might be an interesting mod. I'll have to look at those next time I have something like this. No way I'm retracing my steps right now. 
