The bits of "flesh" may be hide fibers as Kreyzhorse suggests. But they weren't the little bits that usually rub off when the gun is run in and out of the holster the first few times. The largest was the size of a dime, I've never experienced this kind of leather before.
Here are some pics of the holster:
Rifleman, the holster was not against my body, it was on the outside of my belt. It was not excessively humid or anything yesterday so I don't think it was moisture.
As for the smell, the closest thing I could imagine to compare it to is if you left a car locked up tight for a few Summer days with an open packet of jerky on the dashboard. I usually love the smell of new leather but I've never experienced a smell like this.
The holster is a Silver Dollar by Simply Rugged. I have already contacted the maker and asked if there were any methods I could use to get rid of the smell or the bleeding, and if I hadn't applied the Sno-Seal he would have re-topcoated the holster and paid shipping both ways. Since I applied the Sno-Seal though, he said "Not much you can do or we can do at this point."
Which I take to mean that I'm on my own with this. So all constructive input is greatly valued. Thanks all for the replies so far, keep 'em coming!
Ivan