water in engine bad?

i have been getting alot of oil in my k&n cone filter and i decided to build a oil catch can. i made one out of aluminum with a sight glass in it and i gues the heat from the engine melted the silicone i used on the sight glass so it fell out. i just checked and noticed this. so for possibly two weeks it has been blowing out my engine oil(when i checked it was only 1/4" on the dipstick) and building up condensation in the engine(there was foamy white stuff on the dipstick). i just filled 2 litres of oil into it. how bad is this? what should i do?

I dont know that much, but the oil could be coming from your pcv valve, so you might need a new one. As far as I know, water in an engine is not good at all. I am fairly new to 4.0s but learning more everyday.

well, there isn't really a pcv valve on my jeep, that is the problem with the blowby that i was trying to fix with the catch can.

IMO there is a positive pressure in the crankcase normally and it's doubtful the white foamy stuff on your dipstick is condensation.
Have you been loosing any coolant?
Not good to be running it much with water in the oil, water doesn't lubricate well. You can let it sit for a couple few days and drain some of your oil, the water will sink to the bottom and be the first out the drain plug. This may give you an idea of how much moisture is actually in there.
I buy five quart containers of good enough oil, for less than ten bucks at my neighborhood Walmart.
It may be time for a compression test.
If the small vacuum line to the rear of your valve cover is clean this can greatly reduce the oil blown into your air cleaner (unless your blowby is way bad), blow through the tubing, poke something through the hole in the valve cover (not too deep), blow through it also into the valve cover. Be carefull with the plastic tubing it gets old and brittle.

What year? 2000/2001 are prone to head cracks which put coolant into oil. If you can get your hands on a cooling system pump up leak tester, you pump it up to just under cap pressure (12 PSI or so) and run engine. If needle bounces around, it is a head gasket leak or cracked head. Coolant in the oil is very bad. Head gasket leak could put extra compression into the crankcase and blow the oil out of the valve cover ventilation. If you take the oil fill cap off and run it does it blow out a lot of exhaust?

i don't know but i'll check tomorrow. i'm not really noticing any loss in coolant though. aslo, its a 1991.