UPDATE:
I have continued to work on my boat and this rotted wood situation. I expect I will be done in about 2 weeks, maybe less.
Here's a more current pic for reference:
I ground down the rotted wood to a hard wood surface or to the fiberglass. Since this photo was taken I have removed the wood on the lower sides down to the fiberglass.
It turns out that the plywood panel joined the sides of the setee (more or less visible at the extreme edges of the photo) to the keel trunk. It's an interesting and crucial junction that provides stability--the wood was embedded 1/2 inch into the bottom of the hull, glued to the keel trunk and the sole, which provides some kind of lateral stability against deflection. The compression post for the mast also sits on top of the keel trunk, so keep that area stable seems like a good idea.
Here the fix: I will replace (glue in) the areas I've taken down to fiberglass with 1/2 inch plywood that I've sealed with penetrating epoxy. The remaining would will be treated with penetrating epoxy in two ways: I will drill shallow 1/4" holes into the wood into which I will eject the epoxy; and then I will "paint" the surface of the wood with the epoxy as well.
Once that is set up, I will use an epoxy glue with silica and screws to join another piece of plywood over the entire area. I may glass ove the edges, but I don't think I will need to. This set up should provide plenty of support for the keel trunk.
I decided to use TotalBoat epoxy and epoxy glue after a lot fo reading and research. The entire epoxy and wood issue is "controversial" (I guess that's the right word) and with many conflicting views, strong opinions, and fights. Check out what's going on at the Wooden Boat Forum if you really want to see some goo knowledge and see some folks get into extended arguments about epoxy!!
http://forum.woodenboat.com
Anyway I settled on the TotalBoat penetrating epoxy because it's a low viscosity epoxy but without solvents (or not a lot of solvents) and has a lot of solids, as they say, which creates a strong seal. Their products are also less expensive and their telephone support was helpful.
HOWEVER, this project has also brought to my attention some other issues. I am starting new threads on those to keep issues separate and simpe. I think I can get my boat in the water for the rest of the season, but I will need to address these for the 2018 season.
Thanks everybody for the help, suggestions, epoxy ideas, and useful information. Take a look at the other threads.
I'll post pictures as the repairs actually take place.
Edit: one more thing: the stabilizer--it no longer has the nylon or teflon end or whatever. Just a metal pipe that maybe provides some stability (or not). Would you suggest removing this altogether or replacing with a new one? Thanks.
"There is nothing--absolutely nothing - half so much worth doing as simply messing about in boats." --Wind in the Willows