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Update Nov. 30, 2008: While the steps shown on this page do work for sanding the interior it is a tedious and time consuming process since you need to stop and re-mount the piece 4 times. A much better, faster, and safer method is to sand the interior using a drum sander in the drill press or, even better if available, an oscillating spindle sander.
Added Photo: Sanding interior with OSS
I installed my step jaws on my Talon chuck.
Photo #5: Step jaws installed.
I mounted the blank on the chuck by expanding the jaws inside the hole.
Photo #6: Blank mounted for sanding inside the holes.
I was then able to sand inside the holes to remove any marks left by the sawtooth bit.
Photo #7: Sanding the holes.
I rotated the piece to grip on all four holes and sanded about half way in to the centre on each mounting.
Photo #8: Faster shutter speed.
Alternatively, you can use a 1” drum sander mounted in an electric drill to sand the interior. That is faster and keeps your fingers out of harm’s way.
Photo 8b: Sanding with drum sander.