That rust is probably in the worst spot (where the top ring on the piston sits during the compression/combustion process).
Use some wd40 and a scouring pad from the kitchen to try and clean it up. You really don't want to use any abrasive products on the bore if you can avoid it before checking for damage and deciding on the next step. Those bores look glazed so would need a light hone regardless but ideally you'd need to measure the bores to see how much wear and tear it has.
So when rebuilding a engine you would need to do the following (when doing a thorough job)
Wash block/ clean oil galleries
Crack test all critical components
Measure the bores, bore the block
Hone to final size to suit new pistons.
New welsh plugs
Fit new pistons on old rods (press fit machine shop job)
Check the rods, big ends for size/round etc
Measure crank journals - linish or re-grind depending on wear and tear/size
Check the mains for size/round
(if you want to be real detail orientated align hone the mains)
Deck block
Deck the head.
Clean head, check valve seats/valves/valve guides. - grind valves/seats and possibly fit new guides.
Check/replace cam bearings
Chase all the threads in the block
Fit new cam
Then you start measuring and fitting bearings to check for clearances
Check the piston rings for proper end gap before fitting on pistons
Clean everything again before starting final engine assembly.
It's a time consuming process that requires specialist tools and training.
The other option is the back yard re-build.
Clean up the rust as best you can, run a hone through the bores and fit new rings. clean up all the parts, check the bearings on the mains/big ends and probably fit some new ones and measure with some plasti-gauge. Clean and strip the head, hand lap the valve and see if they come up alright. Clean everything and re-assemble with new gaskets. Paint it and drop it in the car.
Looking at the block deck though that will most likely need to be decked.
edit: oops, forgot balancing of the rotating assembly. Possibly not required if the new pistons are very close in weight to the stock pistons.