Dremel tool and bits is pretty ideal for porting and polishing. You can do it with a drill as well, and even hand filing will work on the intake and exhaust ports. I begin by raising compression. I generally eliminate the cylinder base gasket and use a sealant there instead.
You need to learn how to measure squish, that is the clearance between the top of the piston and the top of the cylinder, using solder. Research it on the web a bit, and I can help you if you want.
A lathe might be required if you have to reduce the height of the piston, once the cylinder is lowered. Taking the squish measurement without the base gasket will tell you that.
I can send you the basic approach information, that which was given to me and really helped.
Oh yeah, a compression gauge is useful too, to measure your gains. You can get too high as well.