Hi Alonzo,
I fed your parameters into my gear generator and you're absolutely right using a 1/8" bit to cut a 1" gear will give a problem. The root of the gear would be undercut however if that's the smallest bit you have and the stress on the pinion isn't too great then you could cut the pinion and it would work because there is no contact at the root of the gear. Having said that there are other options:
I don't normally use "router" bits I use drill bits since my cut per pass is usually around the 0.07 " cuts. There is a huge supply of micro bits at
Metric Drill Bits Resharpened 5 Pack
So I will search for the bit size I want at:
drill bit, drill bits,shop tool, drill bits,carbide drill bits, pcb drill bit, pcb drill bits, optical drill bits,small diameter drill bits, High Speed drill bits,carbide router bits,carbide end mills, PCB carbide drill bits, CNC drill bit, hobby too
the big advantage is that these are the cheapest that I have found and you can get "resharpened" ones further reducing the price. I usually buy in quantity (10 to 50) because at the small diameters they do break easily. I try a 1.95 mm bit first on the design because this is a fairly strong size.
or
Microcut Carbide Micro End Mills
these are really good bits and available in the sizes I want however they are more expensive sometimes as much as 10 times - but if that is the only one I can find i'll get a couple.
or finally
Engraving Cutters | End Mills | Tools for Milling Wax
These bits are more aimed at engraving which I also do some. They also have nice round end bits that are great for 2.5 D carving (bass relief)
If you are new to all this I would recommend starting at
Metric Drill Bits Resharpened 5 Pack
since breaking bits won't break the bank. The rule for me is take shallow cuts and go fast enough not to burn the material.
Hope this helps a little
John
You can't fail as long as you keep trying!