Hate to have to bring it up but a crack can also let coolant leak into the oil.

Yeah, I'm kind wondering now if this might be a coolant issue.
But, I was figuring for sure the oil analysis would have disclosed that.
I have had a couple of cases where a leaking head gasket was letting water track from a coolant passage over to an oil drain passage. But not on Toyota engines.
The engines had good compression and did not show any of the usual signs of coolant leaking into a combustion chamber.
One engine that bugged us at a job I worked back in the 70's led us to drain the oil out of the engine and place a catch pan under the open oil pan drain.
Then we pressurized the cooling system and left it.
Yes, pressure leaked off and we pumped it back up.
In a little while we started to see coolant dripping out the oil pan drain. We also had all the spark plugs out and none of the cylinders were filling up with coolant.
Pulled the head and finally saw where the coolant had etched its way from a coolant passage to an oil return passage.

If this condition is a new symptom perhaps you have a faulty head gasket- the symptom to look for with this issue is the level of oil on the dipstick- is it raising up on the stick? Pressurize the cooling system & see if it holds pressure.

I just replaced the thermostat and the engine is not running any hotter than with the old thermostat. My IR temperature gun still reads 81C on the back of the water pump. The new Toyota stat was rated at 76.5C, same as the old one.

"milky" isn't strong enough to describe the emulsion of water in the oil that I just drained for the second time in a week. This oil has only been in for about two hours engine run time.

I have a Dwyer magnehelic gauge that reads inches of water column and I measured crankcase vacuum and it read 1/2 in water column vacuum which indicates PCV is working properly. A visual inspection of the PCV valve shows nothing out of the ordinary.

Sure the engine does not run for very long each time it is started but we have had the forklift for over a year and we used it the exact same way last year and did not have this water in the oil.

I am going to sample the oil again and get it tested. Perhaps the lab missed glycol last time.

short run times cause condensation
engine not breathing because of pcv valve can cause it
blown head gasket definitely can cause it

quite a few thing actually

i'd do the oil & filter changing definately
check compression (just to be sure)
clean or change the pcv valve
and try to run the engine till hot more frequently

In reading your other post about the tube issue- you state that this unit was purchased at auction about a year ago. Given that info- if the unit's last life was subject to multiple cold starts throughout it's day that would certainly account for the milky engine oil.

With that said- it might take numerous oil changes to get all that sludge out of the engine. As was previously stated- replace the engine thermostat, use thin engine oil -10w- & let the engine run (about 1,000 rpm) until the oil starts to look milky again. Then change oil & filter & repeat- complete this cycle until there's no more milky appearance in the oil after it has been run for a while.

I would also check the pcv valve and hose to make sure that's ok.

Thanks, L1ftmech. When I changed the oil last week and started the engine, the upper rad hose was warming up within five minutes, well before engine operating temperature was reached. I know that, in engines with the stat located at the upper rad hose, this indicates a thermostat not closing properly. But this engine has the stat located on the lower rad hose. I have a IR temp gun and will investigate temperatures to see if the engine is reaching full operating temperature. I will probably replace the stat anyway.

The dipstick falsely indicating water does not apply in my case since the engine oil really had a lot of emulsified water in it when it was drained.

As per your suggestion, I will focus on the operating temperature.

First thing to check here in a case like this to to make certain that the engine thermostat is working and is of the correct temperature rating.
A cold running engine is unable to quickly heat up the engine block and pistons so they can expand to the close tolerances they need for both efficient combustion, and to minimize combustion blow by past the rings and into the crankcase.
Water is a byproduct of the combustion process and the water will be blended into the lube oil and form an emulsion. This emulsion is usually a short lived phenomenon, but in cold running engines it can persist and build to unacceptable proportions.
Engines running at the proper hot operating temperature do not have a problem expelling the water from the crankcase oil because the water will evaporate out of solution when the lube oil heats up.
Engines that get cranked up and run only a few minutes at a time throughout a work day, never reaching full, hot, operating temperature are also susceptible to having water entrained crankcase lube oil, even if they have a good working thermostat of the correct temperature rating.
Engines that have a long dipstick tube, especially if the dipstick does not seal tightly to the tube, can give a false indicator of water in the oil when operated in cold ambient conditions. This is due to the long dipstick tube staying cold in the ambient air conditions and because the dipstick does not have a tight seal, the crankcase is allowed to vent out some blow by gases (which will contain water vapor) and some water will condense inside the dipstick tube. As the dipstick is withdrawn from the tube, it will drag some of this water/oil emulsion out with it. Dipsticks in these cases often take on a rusty appearance too.

A cold running engine can also account for a loss of power.