I'd disassemble, clean and relube ALL the bearings, including the freewheel, headset, crank, hubs, both derailleurs, etc. Even the brake caliper and lever pivot points and shift levers should be looked at.
Most of the rust looks cosmetic to me. Coat the rusted areas with some oil or a thin grease film to try and stabilize them.
I would soak the chain and freewheel in oil/solvent, clean them off, wipe off the excess and use them as-is for now. That is, unless the chain is frozen.
Ditch the kick stand (get rid of it).
Remove that stupid outer chain ring guard.
It's easy to move the shift levers to the down tube but not so easy reach them there. I'd wait on this one.
Get rid of all those dumb reflectors and brackets.
Get a decent seat.
If they really are steel rims, replace them with a good aluminum rim and use a good tire. If you are going to spend more money, spend it upgrading the rims and tires.
P.S. - great find, it is very "clean".
Last edited by Mike Mills; 11-13-08 at 07:20 PM.