I have an old toilet whose fill valve I want to replace with standard Fluidmaster/. The problem is the hole in the tank is 7/8" dia and the Fruidmaster shank with washer is about 1" in diameter. Is it realistic to think I can ream about 1/8" of the 5/8" thick porcelain using a 1"diamond hole saw?

You are welcome to try and, if successful, the first person to succeed. Here are two issue to consider, your hole saw needs a center drill bit and there is nothing for it to center on. The porcelain covers even inside the original hole and you will be removing that surface so bacteria will be able to grow inside the china. You can buy a replacement tank fairly cheap. In some cases a used one may be a perfect match. Toilet Tanks, Salvaged @ This Old Toilet®

Agree with Bob. Its not going to work. Now, I know the washer on the fluidmaster has a lip that is supposed to fit in the hole, but if it doesn't, no need to worry. As long as the shank fits through the hole, just set the fluid master in, tighten up the nut on the bottom side, and it will smush the lip on the seal. It will seal up just fine, and you will be good to go. Or you could use any rubber washer of approximately the same thickness and inside and outside diameter, and use it in place of the washer that comes with the fluidmaster. Good luck and please let us know how things work out.