To borrow from Tony. :)

Iron + Water/H2O + Time = Hematite

[Hematite is a ferric iron oxide mineral that forms by a variety of processes that often involve water. Fine-grained (dust-sized) hematite generally forms by the weathering of iron- bearing minerals by oxidation (rusting), which can occur in an atmosphere at low temperatures. This fine-grained material has been previously detected on Mars and is widely thought to be an important component of the materials that give Mars its red color. The coarse-grained hematite discovered by the TES is even more intriguing, however, because it typically forms by crystal growth from hot, iron-rich fluids. Coarse-grained hematite can form when large amounts of hot water move through iron-bearing rocks, dissolving the iron and carrying it away in solution. As the water cools it can no longer hold as much iron and the dissolved iron is then precipitated in cracks and veins in the surrounding rock. On Earth these hydrothermal systems commonly occur around volcanic regions, such as Yellowstone.]
http://emma.la.asu.edu/webdata/hematitepr.html

Meridiani Planum, courtesy of Mars Global Surveyor:

From: http://www.msss.com/mars_images/moc/2003/05/01/

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From: http://www.msss.com/mars_images/moc/2003/11/15/

There's a good animation w/simple explanations at the Mars Rover site. Click where it says Rover Landing Site Flash Animation' to the left of the Grey bar (just found that one).