I bought a rebuilt M/C from Canadian Tire - along with it was instructions for "bench bleeding" the M/C, as well as a bench bleed kit (two small hoses, and nipples that fit the two outlets on the M/C).

In the instructions, it stated when all the air was expelled, it is normal for some fluid to "rise" from the bottom of the reservoir. - This was the "Backwash" that I noted earlier.

So I rebled the M/C - and the pedal seems much firmer now than before - there was some air bubbles when I bled the M/C - even though I had bled the M/C using the "cracked" open slightly method.

As it stands right now - I do not think the M/C needs replacing - but I will drive the car for a few days to figure things out.

Thanks to all who replied with info & tips.