Part of the problem is that 1/8" O-rings are not 0.125", but instead are actually (usually) 0.139". Because of this you must use different O-ring groove dimensions.
The other factor is that there are different O-ring dimensions depending on water vs air vs vacuum.
I just built a waterblock with an O-ring groove and originally used the 0.125" dimensions and the groove was too small. I then remachined the groove width and depth to the dimensions given here on this page and it worked great:
http://www.mhatt.aps.anl.gov/dohn/re...ace_gland.html
You use the groove width for liquids on the chart. Remember that you have to have room for the O-ring to squeeze, and remember to make the depth compensate for any sanding or lapping that you might do to the top side (where the groove is) after machining.