I did up a similar thing recently. I found that a wire brush (very rigid sharp wire) was good for removing rust from bars and rims. You can either sand down the frame (strips of emery cloth work well) and paint it. Or alternatively If you like the rusted look you could either just spray laquer onto the frame or put linseed oil on the frame, that will stop the rust where it stands. Any of these options require the frame to be very clean, just use soapy water and a sponge
I would echo putting in new balls and grease. I would sugest putting a 22tooth cog on the sturmey archer because the gearing on those old things is usually rather high
These things are bomb proof and will last 100 years if cared for
here is a slideshow of what I managed in the back garden with basic tools to show it is doable http://www.flickr.com/photos/55203562@N ... /lightbox/
just scroll through by clicking "newer"