According to the '88 Kawasaki Service Manual for the KX500, cylinder Compression (usable range) is 105-164psi. The supplemental manual for '90-'03 does not have any updated information, so the same usable range should apply.
Based on your compression findings, it should be OK, though maybe not optimum. I would definitely do a leak down test to verify there are no air leaks (crank seals, etc) before running it hard.
As for the air filter, most anything is good now days. On my 500, I us a No Toil filter and associated cleaning system.
I would imagine it would be best to remove the top end, make sure there are no obvious issues with the cylinder plating, clean the power valves, check big end rod bearing and reed petals and re-ring or replace the piston and small end bearing if clearances warrant it. Much better safe than sorry... Good luck!