I use a 5mm brad point drill in a bench drill, I find the last 1/2mm ring usually comes out on its own or I can lift it out with a dental style pick. I get my abalone dots from Realtone in Brisbane.
I have yet to take out the dots, though i have done some other custom inlay work on the PE SV and the IB Freebie. Must try that at some point.
FrankenLab Hand crafting guitars, because Death Rays are expensive.