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 1Ē drum sander mounted in an electric drill to sand the interior.† That is faster and keeps your fingers out of harmís way.
Photo 8b:† Sanding with drum sander.