Welcome Rodbuilder,
As others have said, the best place to start is with a simple air/steam engine. If you really have your heart set on an IC engine, one of the easiest ways to get started is with a "Simple Single". With a simple two stroke engine, the hardest parts to get right are the cylinder and piston and with the Sherline equipment you are going to build something small (or be very ingenious) and that makes the problem worse as tolerances get tighter. The Simple Single uses a Cox 0.049 cylinder and piston to get around this. It was serialized in 6 issues of Strictly IC magazine years ago and plans are available from the author at reasonable cost. Link to the plans is:
http://www.modelenginenews.org/rsch/index.html
Scroll down near the bottom of the page. Additional details are at:
http://modelenginenews.org/design/design2.html
Cox piston and cylinder sets are available on ebay for nominal prices, and the Cox Surestart engine still shows up regularly for 10 to 15 dollars.
The main problem will be if you do not have the thread cutting attachment for you Sherline lathe. The Cox Cylinder mount uses a special thread and I only know of one source for a tap. Jerry James had a special run of them made up, but they are not cheap, but it is an alternative if you can't cut threads on your lathe.
http://www.jamesengine.com/index_files/Page435.htm
If you use a tap, you will be limited to using the Cox glow head and they are a little hard to come by. If you can cut threads, then you can make a conversion head to use standard 1/4-32 glow plugs or make a compression ignition head and use model diesel fuel. If you should go this way, email me as there were a couple of errors on the original plans. I have not seen a current set so I don't know if they were corrected or not. I have built four versions of this engine and they all run well.
A very good source for model internal combustion engine construction information is:
http://www.modelenginenews.org
Start with the editorial index and click on the links and photos and just search the site in general. All the back information is there with how to articles on most aspects of building model IC engines. Plan to spend a week of evenings there, two weeks if you have a family.
Also subscribe to Model Engine Builder magazine. It has plans for engines in every issue and back issures are available. It is a high quality magazine, but publication dates tend to wander around a bit. We all wait anxiously for it to come.
Gail in NM,USA