Jim,
The best Fox 35's I've run I lapped in. I used 0.007 lapping compound. You can use white DuPont rubbing compound, it just takes a little more time. You have to disassemble the engine. If the cylinder is a little difficult to pull out use a heat gun to warm the case and it should slide out. Remember to watch which port is on the exhaust side.
Put a small amount of whatever compound you choose around the bottom of the cylinder and top section of the piston. This is just a wipe of compound not a lot. Slowly move the piston into the cylinder working it up slowly deeper, twisting it as you push in then out. Once you get to where the piston baffle is within say 1/8", clean off the compound and test fit the piston to have just a little pinch at the top. Some like to go to 1/16" but I go with the 1/8". Once they fit, clean the piston and cylinder with hot water and detergent, dry them, oil with light machine oil or after run oil (make sure you oil the ends of the wrist pin and connecting rod ends). Once the engine is re-assembled you can then mount in the test stand and using low nitro, high oil 25% (50/50). Use the 9x6 cut to 8 and run it rich for a couple tanks then starts pinching the fuel line to up the revs a bit. After about three tanks (assume 4 oz) you can switch to a full 9x6 and start to bring it to a fast 4 cycle for three more tanks. After that remove the plug, slowly turn over it over through top dead center, it should be smooth. If still tight run a few more rich tanks it should be ready to bring up to a rich 2 cycle. A few tanks at rich 2 cycle it should be ready to put in the ship and fly a little rich to make sure you have it set.
Best, DennisT