Everyone has their own way of dealing with something like this. What I'd do would be tear it down, clean it up, dingle ball or spring hone the cylinders for a decent cross hatch, replace what NEEDED replacing, then throw it back together and see what it does. Since others have mentioned the oil pump - I'd pull it apart too, but I'll bet it's fine. Oil pumps are so simple I couldn't see how it'd get screwed up even if it did suck up some water or something. If rust in the pick up tube is a concern, I'd get myself a bore brush and run that through to the screen while submerged in a tub of solvent, then use compressed air to blow back through it to dry it and get rid of any residual debris before reassembling it all. From what I see in those pics, I don't think you'll have too much trouble making it a decent running engine again after adding some elbow grease.