I have recently being experimenting with this and it has worked out pretty well. I used it on my Jedi Zoran Erida. I converted a pegged head to fit on an ROTS Red Leader Obi-wan. The Figure can be seen here.
Here is what I did.
With the head warm (either from boiling water or a hairdryer). I used an exacto knife and cut a "V" shape alone the jawline and the hairline as shown below.
Then holding the head upside down with a pair of piliers, I drill a small pilot hole up into the head at the point on the "V" with my dremel. Then I use a 1/4" tapered bit
on my dremel to hollow out the head. Dremel also has different sizes of cutting bits depending on the size of the hole needed.
I would recommend practicing on a few spare heads first. I also want to thank chewie for walking me through the process the first time I tried this mod.