I use plain (unscented) mineral oil to prevent rust. The reason is, it's food-safe. You can get it in the health/beauty dept at your local store; it's cheap and a pint lasts a LONG time.
I'm not crazy about petroleum oils or waxes because all my knives are users and I wouldn't want to eat that stuff if I go to peel an apple or cut up a steak, and there was some residue on my blade. Granted mineral oil doesn't taste great either but it's pretty easy to wipe off and won't make you sick.
When storing a blade in a leather sheath, I clean it, dry it, wipe it down with the mineral oil, then wrap it in saran wrap and place in the sheath. I feel the wrap protects the oil from wiping off, and keeps the oil from gunking up the leather.
To remove mild rust and stains, I just re-handsand like I normally would, starting with a high grit. I haven't had to restore a really bad piece yet. Maybe I'm just lucky but even my old Ka-Bar kit knife (not parkerized) that languished for 20 years in its leather sheath wasn't too bad to clean up. The sheath itself was kinda moldy though.