Ok, I've done the polishing on the bleeder screw seat and I've had the system under pressure (~10psi) and no leaks! We'll see what happens when I get it on the road, but it's way better than what it was.
Here is what I did:
- get a 5/16" wooden dowel and put a 90 degree point on it. I used a drill and 150 grit sandpaper.
- remove, drain, and disassemble the brake caliper
- using a drill and the wooden dowel, apply a bit of valve grinding (or lapping) compound to the tip of the wooden dowel, insert it into the bleeder screw hole, and run the drill for 5-10 seconds
- repeat until satisfied
- using high grit sandpaper (I used 2000 grit wet sandpaper), polish the tip of the bleeder screw. The bleeder screw fits nicely into a drill as well.
- clean everything THOROUGHLY. You don't want to leave any grit in the threads or in the piston chamber.
Resemble everything and test. How do you know when you are done? I'm not sure other than your bleeder screw no longer leaks.