Hi Hots, The telephone bug circuit is wired in series with red wire of the phone and phone line for power for it (IN2, OUT2). Therefore of course you have to cut or disconnect it. The green wire from the phone line continues to the phone's green wire but also connects to the circuit for sound (IN1, OUT1).
Its switch connection is not drawn correctly and shuts off the phone too.. It should be connected to short across the circuit from its IN2 to its OUT2.
I wonder how brightly its LED flashes when the circuit is on and the phone rings. Maybe that's when the LED burns out.
A 9/64 drill bit is exactly 9/64ths inches in diameter, duh! If you don.t have one use a 1/8th inch or 5/32nds one instead.