Dennis - perfect! Thank you!! Yeah I thought I might have to smooth out the lip bit more, so the plywood lays nicely flat, at least that was my thinking anyways. I have to admit, I start to get a little scared by grinding further than what I have already for fear I am going to go too far and start going through the other side and out through the gelcoat!!
The holes that look a little buggered up - yes, I did notice that - and that is a concern of mine with also taking into consideration (which was going to be part of my next question) the bow eye replacement I have is just a bit smaller than what I had - meaning the U - in the bolt does not match the holes. I have ordered returned - ordered again, the only two bow eyes that are 1/2 thread - both are on the short side. So since I have some repair work to do with the holes anyways, wondering if I should just epoxy one of the holes and re-drill the hole to compensate for the offset? More on this once I figure out this part of it, how to really correct the hole to begin with though. ..
Skunkboat - yeah, I would LOVE to keep it all on the inside! But as noted above I think I might have to do some gelcoat repair - maybe!!!! Hopefully if any, very minimal. This is actually my 2nd glass job, I had replace the floor over the gas tank a few years back .. that was a tough one but I learned a lot. From that I still have the west marine epoxy mixes and even some glass left over to complete this job.
Dave - no clue to the rot from the outside, no.. only until I went inside the anchor box to locate the original problem I was having, did I really, I had a much bigger problem. When you say you'd use solid hard wood for the new block, are you saying instead of the plywood? What size block are you suggesting?
You lost me on this one - "
also you can apply epoxy sealer inside the eye holes with a pipe cleaner instead of the oversized hole trick. it's easier and the sealer will fully penetrate the wood" - Can you clarify for me.. sorry -

This idea might also change when taking into consideration my dilemma with the bow eye being slightly smaller than the original.
Thank you for the suggestions, sounds like solid prep work!