Re: Water in the Oil
I would venture to say it is from sitting at this preliminary point. Drain it, put fresh oil in, and keep an eye on it. If you don't have a mystery coolant leak you are probably ok. This is a common problem I've found with rear ends, transfer cases, transmissions, engines, etc from the smaller, cheaper salvage yards. They don't vacuum pack the stuff in ATF and you end up with some rust on gears and sludge in pans. I've never had a problem after a good flush, but I watch those parts closely after installation. Everything gets flushed and filled with fresh fluids, run for a bit, and then drained and refilled again. You should do the same.
Also, remove the radiator cap and look in for bubbles coming out and listen for air. Usually if coolant is getting into the engine where it shouldn't then exhaust gases and blowby are getting out where they shouldn't as well.