As far as cheapest/easiest way of "lowering" I would say that you could shave down the seat foam as much as an inch in the center without it feeling too brick like. For actually lowering the
suspension, some people suggest using a lowering link such as
http://www.koubalink.com/KTM.html but it does have some noticeable affect on handling and if you ride hard it is likely to have the rear wheel contact the rear fender when bottomed. Another method which is cheap (if you can dissassemble the shock yourself) is to put limiting spacers underneath the piston which will stop the rear wheel from extending as far (you are losing travel this way, so weigh out the pros/cons for yourself.)
As far as the front end goes, you can loosen your triple clamp pinch bolts and slide the fork legs up the desired amount, you may be able to get around 1.5" this way, just make sure that your front wheel won't hit the fender/lower triple clamp on full compression. You can also do similar to the rear with lowering spacers, it is just a bit more in depth than sliding the tubes up.
I can't comment on the engine mods as I've never had an earlier lc4 apart.