I don't think I'd use a dremel, it's a bit overkill and could easily result in cutting away too much. Jeweler's files are probably the right tool, tho I've never used them for anything. Perhaps you could attach a bit of felt to the edges like on the CD drive for some scratch protection. And if there's room, I'd look in to making a compartment that is sealed to prevent stuff getting in to the internals of the computer except for in your iPod touch port.