[MetalMan]

HF sells an in-line moisture filter that I use on my air compressor, and as redshift mentioned this is a good choice because moisture can make painting rather difficult.

As for water in the tank... think about it this way. There is moisture in the air, and the compressor brings that air into the tank. At higher pressures water vapor will condense into liquid water, and will collect somewhat on the wall of the tank. The drain at the bottom of the tank will allow this water to be released, and chances are you will be able to see the liquid spray out.