Did you actually have water in the oil the first time? From the thread title, I assume you did.
If so maybe what you have now is possibly left over residue from the previous water in oil problem. Did you drain the oil the second time and examine it? Did you clean up everything after the first time?
I have never heard of using Teflon tape on the bolts, I normally use gasket sealer on the threads of bolts that go in to the water jacket.
