There have been a lot of questions on the MTBR framebuilder's forum about this, so I thought I'd do a little pictorial.
I use a 2.5" holesaw to cut an offset cut in my sleeve/lug material, set up so that the saw is right at the edge (a quick tip: use duct tape to mark your mill table, if you have one, to tell where you need to line things up without spending lots of time with an edge finder every time).
For an 1 1/8" OD tube, you'll want 1.25" x .058" material for the sleeve (you can turn it down on the lathe to save a gram or two, but I don't generally bother). If you want to slap a sleeve on an externally butted tube, a 1.2 or 1.3mm wall external butt will work with 1.25"x.035" material, and a 1.0mm wall tube will take a 1.25"x.049" pretty well. In between, you'll need to ream out the inside of the .049", which isn't fun for anyone.
In any case, here's a picture of the sleeve/lug after cutting on the mill. You can see that I hit the edge pretty well!