That difinitely looks like water intrusion. Not rust, but water oxidation. Some one must have used a power spray washer on the wheels at some time in the past. You might think about replacing the bearring at this point to be on the safe side. Some very fine steal wool and WD-40 will remove it off the axel. Not to much...just a little scrubing, that's all. Then grease it well when you reasemble it.

You might want to remove the front wheel at this time and check it out to see if water got into that axel as well.

Thanks for the heads up.
I'll look it over carefully, and the front is off already with no problems..
After I clean it up, I'll get a professional opinion here at work before putting it back together.

Remind me to never change my own tires again.
It was much harder (and dirtier) than it looks, even with the right spoons/irons.

Got the tires mounted and installed and the bike mostly back together.
As far as the seized swing arm, the bearing cleaned up and felt fine, but the axle shaft itself was pitted and kinda rough. I used a bit of emery cloth to smooth out the high spots, cleaned it all up, recoated it all in a bit of grease and it slid right into place with no problem.
Of couse it all might fly apart or break off at 60 mph......

No, I'm sure it'll be fine.
Thanks again for the helpful info guys.

Oh my gosh! With all that information and my head is spinning. The pictures and all the informative information regarding wheel removal and oil types is fantastic.
I do use straight synthetic (amsoil 10-30) but now realize I should be using a higher grade. I don't need a tire replacement at this time but will soon and I am glad to have all this information at hand.
Thanks to all for the GRATE information.