pulled my drives today and when I cracked the gasket loose on the ports side a rusty colored brown oil came dripping out.

there was about a cup full between what came dripping out and what is still sitting inside the bellows, its thick but doesnt smell at all like Merc gear lube, and really doest smell like tranny fluid and there didnt appear to be any water in it at all. I havent checked the tranny fluid level yet, but what are the possibilies that the rear tranny seal is shot and oil made its way back thru the tailstock past the bearings in into the bellows??? also why the rusty brown color?? Any ideas what is wrong here? its a TRS/Borg Warner setup.

Could be either tranny or drive. Red is usually tranny fluid. Or if you're real lucky it's just motor oil, tranny fluid, drive lube, or bilge gunk that spilled on the tranny tailstock and ended up in there. That donut seal doesn't seal too well.

was kid of wondering about that since it really doesnt look or smell like either tranny or drive oil.

pressure check the drive to see if the upper seal is ok and look at the bellows for a crack. Was there any water in the bellows or was the oil milky?

If it's trans fluid you gotta pull the motor and replace the rear seal on the tailstock if it's a borg warner.