Originally Posted by HughN
Today I discovered the same thing on my Mariner (Yamaha) 30 - in fact there was no oil in there at all - just seawater.
I've seen emulsified oil (goes like mayonnaise) when water is present, but no gear oil, that's got to be a first. Goodness knows what damage is likely to have happened without lubrication.
You'll need to use a neutralising solution to ensure all the salt crystals are dissolved in the gear case. White vinegar will do, then warm water and baking soda to remove any acidity. Run some Duck Oil penetrating lube through it, and drain.
I'd use general purpose gear oil in it to lubricate initially, then replace water pump seals and prop-shaft seals. I'd also pressure test it to eliminate the possibility it's leaking somewhere else. Renew fill and drain plug washers. If all airtight, then drop the oil (checking for metal fragments) and renew with Yamlube or Quicksilver gear oil.
No guarantee this will work, but it's either that or a new lower gear case unit.