So I have this Window unit in My room and it appears to have been letting water inside and has now caused some minor damage. I doesn't appear as though the stain is very big and I've got towels soaking up water on the floor.
How should I go about making sure the wall is OK.

http://i1119.photobucket.com/albums/...toast/wall.jpg

#1 is finding out where the leak is and fixing it so it doesn't leak any more.

You are going to have to cut out and remove the damaged sheet rock and replace it once that is done..

Yep, good advise.