Thanks for the quick responce Bob, i really needed someone to say something...
the flywheel came off the torque converter so those parts have been working together for 106k miles (i had to put the old flywheel on the new engine) and BTW those are the only 2 pieces that get together so far. the torque converter bolts are in the flywheel holes, i can see them. what i am more concerned about is the axle in the middle, may be that's what causing the closing of the gap on one side and the opening of the other side...and just grinding them holes - that is the simlpest, yet the greatest idea i've heard for a long time...
and my biggest concern - that egg size chip off the bellhousing... yes, it is only one of 7 bolts but would it pass the highway inspection for a swaped engine welded with JB? nothing would leak or anything but it will be there for the buyer to see... and the main thing - is it going to hold strong enough...