Ok, I get this question A LOT… and a while back I finally just wrote a guide for it… I finally figured I should share with everyone else.
The question of course is “What do I need, why, and how much does it cost?”
The following is based on the Taig setup, however you can use it as a reference guide for any company/brand etc. as far as what you need. This is the basics, yes, there is a lot more… but it’s a starting point since it’s a fairly overwhelming thing to figure out on your own.
The following is a list of ‘necessary’ or useful tools, as found here… Please note that the prices listed do not include the 10% discount you get on all lathe and accessory items (no discount on motors). This list includes ONLY the absolutely essential parts.
All of these parts came from Taig Detailed Price List with Pictures
Essential Parts:
L1017 - $184.75 - Micro Lathe II basic unit, assembled. I suggest this because without a familiarity with lathes, the unassembled unit will be more difficult to set up.
1021W - $98.50 - Marathon Motor. This is an awesome motor that can take a lot of abuse. However, almost any motor will due if you care to find one on your own… they can be found in things like scrap yards, treadmills, etc. and you can find them cheaper… but this one is great, and you don’t have to look for it 
1162 - $24.45 - Pulley’s and belt. Quite simply, they are what connect the motor to the lathe. Specify that you want the long belt… as there are 2 different lengths depending on how you set up the lathe.
1023 - $7.50 - Mounting Board. The easiest way to set up the lathe… it has all the holes pre-drilled all you have to do is follow the setup instructions. You can make your own, but for $7.50 it will save you a lot of trouble.
1022 - $5.00 - Mounting Brackets… what you attach the motor to.
1050 - $63.10 - 3-Jaw Self Centering Chuck - The workhorse of the lathe, it’s what holds all the parts. This is a good general purpose chuck, with soft aluminum jaws that can be shaped to hold whatever odd yo-yo part you need. I use this chuck for probably 85% of my work.
1095 - $27.60 - 6 Piece Bit set. These are the ‘basic’ lathe tools. 6 different shapes for various cuts and work… a good starting point for learning. Ideally, you will eventually learn to grind your own bits as needed, but these are a good start.
1310 - $7.50 - easily the most useful tool I have. Allows you to easily remove the chuck… very simple, but amazingly useful since the slot is so thin.
Total after applicable discounts - $386.41
You can save quite a bit on the motor if you find one elsewhere. Pretty much any similar motor with a 1/2" shaft will work.
Useful Extras:
1150 - $38.20 - Drilling Tailstock. This allows you to use the lathe as a drill by mounting a fixed bit onto the bed of the lathe, and spinning the part. (exactly the opposite of a normal drill). This lets you drill holes in parts, tap threads for screws, etc. Very useful.
1051 - $7.90 - Additional blank jaws for the chuck. This gives you a greater flexibility in what you can hold in the lathe. You can cut each set to hold various things. I have probably 9 or 10 sets of these at this point for all the odd things I’ve had to work on… all cut to different specifications. These are an add-on and not absolutely necessary, but cheap and nice to have. I’d pick up at least one extra set.
1096 - $1.95 - Unground bit blanks. These allow you to grind bits to any shape you need for all kinds of cuts. You just need a bench grinder, easily found at any hardware store for around $30. I personally have 20-30 of these at this point for different cutting operations, but just a few will give you somewhere to start.
1173 - $27.90 - Cut off tool. VERY useful. The most rigid way to cut off parts… often used for cutting off rings of yo-yos and parting off sections of material.
1090 - $36.25 - Jacob’s drill chuck - industrial quality. These are like the drill chucks you find in, well, drills. They mount on the drilling tailstock to hold bits and taps. You can go cheaper and get the 1092, but I prefer this one as it is -really- durable and strong. I find that with the smaller chuck, when you use small bits and taps (common for yo-yos) they tend to flex more and cause problems.
Remember to the above prices for extras don’t include the 10% discount.
Non-Taig Items that are great for yo-yo modding.
Threaded rod in various thread sizes. The common ones for yo-yos are 4M (duncan and some Kyo yo-yos), #6 (yoyojam), #8 (many metal yo-yos), and 1/4" (many metal yo-yos) You can often find these at hardware stores, or Fastenal stores (www.fastenal.com) if there is one near you… or of course online.
Add to that nuts in the appropriate sizes, and some washers, and you can build a “draw-bar” to hold yo-yos. EXTREMELY useful for modding, because holding the curved side of a yo-yo is nearly impossible without building something to thread the axle into.
Basically the threaded rod passes through the headstock of the lathe, into or through the yo-yo and is screwed together on either end… this holds the part securely against the chuck, and you can tighten the chuck to center it.
And there you have it… all you ever needed to know.
Kyle
EDIT: Some prices may have been adjusted since this was written, please check www.cartertools.com for current pricing.