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Jill says:
Don't trash even a rusty cast iron skillet! You can season it like new, but the wonderful thing about it is that it will be old. I think the older the cast iron, the better. It can be scrubbed down with steel wool and re-seasoned.
Get some steel wool pads and scrub your little heart out till all the rust is off. Wipe it out with a DRY towel or paper toweling. Put it in a cool oven, then preheat the oven to 350. After about 5 minutes (before the oven is fully preheated--be careful; it might already be hot), pull out the pan.
Then get some vegetable oil or vegetable shortening and rub it all over the pan, handle, underside, everything. Bake it in a 350 oven upside down (with a baking sheet underneath it in case you have drips) for about an hour. Let the pan cool in the oven. DON'T TOUCH IT; it will be scorching hot. Those things hold heat like there's no tomorrow.
When it cools, it may be a little sticky. Don't worry about it. That stickiness will eventually cook off. Re-season it in that same fashion once a year or every two years.
Never clean it with water; to clean it, pour in a tiny bit of veggie oil and a good amt of kosher salt and scrub it with a cloth until it comes clean. If that doesn't do it, you can try a scrub with a damp sponge, but immediately put it in the oven to dry.