Internal Engine/Cleaner/Lubricants

You can remove rust without removing any of the uncorroded steel by soaking for a day or so in a chelating agent, and washing in water. There seem to be lots on sale recently.  'Evaporust' was and perhaps is the market leader.  A quick search turns up lots more.  A few rust pits shouldn't do much harm.  They might even help to reduce future wear by retaining lubricant...possibly.
No need to use mechanical methods which wil remove good metal.

As we know SPAIN has just had a very bad experience with flooding. And our man in Spain is inundated with this issue.
The question has been about electrics. This is my take on the subject. The majority of our electrics are a sealed unit, ie ignition coils, even Boyer Bransden amplifiers and regulator/rectifiers. Hence provided the outside of the unit is clean the units should still work. The only problems from serious water/mud ingress is actually on boards that carry electricity. Magnetos having water inside is not a good idea! either. And water/mud all round the loom can't easily be cleaned, so a rewire might be in order.
Another de-greasant for engines etc is WD40 as of course it dispells water and oil.

Looks like your rear brake linings  completely worn out .Cylinders  and pistons may be re-usable after a hone and new rings . A little rust  etching  in bore is not a problem 

I have used this previously and it is truly remarkable stuff. I have just ordered another 5Ltr to do my rusty tank I plan to fill it with around 8-9ltr and roll it around over a day to get it clean I will attempt to post results.

The beauty of evaporust is it is completely safe to use no issues with hands or eyes and you can probably drink it (Not advisable) 

The other thing is you can use it again and again. 

Craig 

a pretty rare 'bolt-up' rear frame you have there, with the bigger radius curve above the swing arm, like the Manx frame. 

   The head gasket faces on barrels and head are two places where some minimal machining may be required.

the rear subframe supporting seat etc on these early frames was bolted on to rear of main loop- can be easily seen in side view. Later, the factory went to all-welded version for widelines and then slimlines.
  It is rare, as only a small proportion of featherbed production was made like that.