all cast iron transfer cases use gear oil. if you find atf in a 205 it's either because somebody mistakenly filled it with atf or the seals in the adapter are bad and the trans fluid is "bleeding" into the t-case. running atf in a 205 will not do any harm, but you should run 90wt anyways. much thicker; likes to stick to all the parts better.
if your t-case had a bunch of water in it, it's probably going to need at least bearings, maybe more. let me know if you need parts, i can get overhaul kits for a decent price and i have 5 205's sitting in my garage. pm me.
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