I appologize for reviving a long dead thread, but I wanted to provide the images I promised before.
Here is a picture of a button with collar:

The collars are created by first drilling a hole in the
phenolic sheet that has the same inside diameter as the outside diameter as your button barrel (plus threads). Then I used a hole cutter in the same spot to create the doughnut. I just made sure the hole cutter was 1/4+ inch bigger then the barrel hole. Here is a picure of the scrap to help explain better:

Once you have done that, just drill a hole into each side of the doughnut to hold the LEDs. Sadly, the phenolic material is a bit "squishy" and so caused me some headaches while drilling. Because of this, I made a simple drilling jig to simplify things. Here is a picture of the jig by itself:

and a picture of it standing up with a doughnut attached as it would be in the vise:

Once I had the knack down for making these, I started using my vertical mill to just race through a long line, first drilling the centers and then going back down the line cutting the holes. This sped things up greatly and saved a lot of time. All told, I did 30 doughnuts. All but 3 or so came out great. I will probably redo those last couple when I get bored. Might as well do it properly.
Have fun!