There is no external rust except for two small spots, but on the chainstays and the tubes above them, there are little drain holes and I can see rust color in there. What should I do to fix this?

One of Ms. Blue Order's bikes has the same issue. I'd be interested in knowing how serious this is too. I just had her frame treated with framesaver, but now I'm wondering if I should have treated it with oxalic acid first, before treating it with framesaver?

What I do with my steel frames is squirt linseed oil inside the tubes, move the frame around to coat the inside and drain the oil.

the framesaver (name brand or otherwise) treatment will help *prevent* more rust from growing by cutting off the moisture and oxygen, but I would rinse with your favorite rust treatment (mine is SEM RustMort, a phosphoric acid blend) and THEN dry it and apply FrameSaver.

^ will that save the frame?

depends on how far the rust has gone into the "bone" of the frame. If in doubt, take it to a frame builder or experienced LBS for consultation. Otherwise, the cost of materials (acid and Framesaver) is low enough that "it couldn't hurt".

Thanks for your help. I think I might take the bike completely apart and go from there.

I have a similar problem on one of my bikes. It doesn't look that bad so I'm pretty it will be fine once taken care of, but how would you suggest trying to "dry" it that was my main fear that prevented me from doing this earlier I didn't want to just leave the rust remover in there.

hang it out in the sun on a breezy day -or- blow through all the tubes with a hairdryer.

Yes, treat it first. Framesaver is meant to protect clean rust free steel. Do a search for oxalixc acid, there are a lot of threads on it that detail the process thoroughly. Here is the before and after of the bottom bracket area of my Trek 950 frame.

^^
Before and after...
Those look like two completely different frames...

they are the same frame. It's just been turned 180degrees between the two shots.

WOW! I will definitely look into that.

Alright thanks I just didn't think drying the rust remover off would be enough because it might leave residue or something. I will probably be doing this with both the frames I'm going to be riding. One is a bit bad, but not as bad as the pic above and still seems structurally fine. The other one just has a few patches, but its going to be my baby once its done.

Unfortunately, I wasn't thinking about the rust stains appearing at the vent holes when I asked the mechanic to apply framesaver as long as the bike was going to be taken apart-- it was just SOP for me to apply framesaver. So all I can do at this point is either hope that he either removed any rust he found on his own initiative, or otherwise, hope that there's no real rust inside.