A while ago I bought a really big T-shirt off eBay (see previous post), and I wanted to make it into a dress.
Some large T-shirts don't need to be taken in at the sides if they are long enough, but this was like a tent!
So here's how I did it.
First, turn T-shirt inside out and decide roughly how much it needs to be taken in. Make mental note or make a mark with eye-liner and begin pinning down the sides. Pin both sides, and remember to leave about half a cm from the pin.
Sew from where the sleeve startsand sew down. After you've sewn each side try the top on to make sure the size is right.
Once the size is right, you need to see how much you are going to have to take in the sleeves. I liked the longer length of the sleeves on mine, so I decided to go for a bat-wing style. I marked out a diagonal line with pins so that the sleeves were tightest at the end. It's pretty easy to adjust the sleeves and there are plenty of good videos out there depending on what style you want.
Here's a slideshow and finished product...