Breathed poorly, started to pull it apart to see what's what. The first stage side of the body was full of water. Well, not literally full, but 1/4 full.
Am I correct in assuming this isn't the way it's supposed to be?
Correct. It could be leaking in one (or more) of three things:
1) Inhalation hose - especially check the ends for cuts
2) Diaphragm - could be a tear or hole or it could leak around the edge if it were folded or kinked in some way when putting the cans together(I've seen old, flattened diaphragms that didn't want to lay down flat)
3) Body-can connection(past the rubber body ring) - check that the body ring was tightened down and that there are no tears visible
That's what I would check first. Aside from that, the only other thing I can think of is a cracked can.