General Maintenance & Repairs - Metal in oil, slight knock, and vibration - engine is toast, but what happened?

The engine is a '89 350 TPI with 104k on it. Here's what's going on:
-There's a lot of metal in the oil.
-There's a slight knock
-I can feel a vibration through the shifter

I just put a T56 in it maybe 700 miles ago. Not sure if that's related or not. LT1's and L98's are both internally balanced, so using an LT1 flywheel shouldn't have thrown the engine balance off. It's also leaking at the rear main seal. It's been a bit damp back there for a year or two, but never bad enough to drip on the ground. Now it is. I don't know if this is a coincidence or not. Any ideas what caused this?

Here's some pics of the oil I just drained out:

http://i120.photobucket.com/albums/o187/MCarll/DSCN2190.jpg

http://i120.photobucket.com/albums/o187/MCarll/DSCN2194.jpg

That oil does not look healthy. Looks like a milkshake... water contamination possibly. Water in the oil will wreck bearings, which would lead to metal in the oil and the knocking.

If it is water in the oil for sure it likely came from a bad gasket.

I can't tell from the pictures. Do you actually see small metal flakes in your oil, or are you assuming that is what the cloudiness is?

I am with SparkyJJO that, at least from the pictures, this looks like water/coolant in your oil. And oil with water in it does not lubricate well.

If you have spun a rod bearing or main bearing you should be able to see flakes of metal in the oil. Wipe some on a rag and look for metal.

Based only on the pictures, you could have a cracked head or block or other problem that is letting coolant into your oil. Does the coolant in the radiator look clean? White exhaust smoke after warm up? Coolant smell to the exhaust?

That oil looks too much like pudding for the problem to be metal.

When I ran a magnet along the side of the drain pan, I could see metal particles being pulled toward the wall of the pan.

The coolant in the radiator is clean, but the level itself is low. No smoke or coolant smell came out of the exhaust.

After I drained out the oil in the pics above, I put some cheap bulk oil in it from work (why waste money on Mobil 1 anymore, right?) and let it run for a bit. I dropped some oil out of the pan and I could easily see grayish, metallic stuff in the fresh oil.