A bit of rusty dust on the seatpost isn't necessarily the end of the world; check that water hasn't been collecting in the bottom of the seat tube.
Pour some in, and see if it comes out a drain hole or something. If it stays inside, the frame may well be cactus... but only if it's actually been filling with water in the first place.
Not sure how you'd check for internal rust... maybe wrap a magnet in tape until it barely sticks to good tubing, and see if it falls off anywhere?
As for cleaning the rust, maybe water down some rust converter and slosh it around inside. Let it dry and apply some sort of oil... someone just mentioned linseed oil is meant to harden into a varnish-type substance after a couple of days.
Last edited by Kimmo; 12-23-09 at 09:04 PM.