It looks to me that it probably had a water pump that was a chronic weeper for a long time to cause the rust.
If you are not willing to remove the engine for a refresh I agree with alexiskia that removing some of the components will be a plus and give you a much more satisfying result. Having your exhaust manifold sand blasted and then coating it with high temp Cast Blast would go a long way in helping the engine look better with a "new" paint job. It looks as if your manifold gasket is on it's last leg anyhow. A new copper clad gasket will look much better than the style that is on it now.
I would suggest using Ospho
http://www.ospho.com/directions.htm on the rusted areas after getting things cleaned up and before painting.
Ordering new hardware sets for the timing covers, valve cover, water inlet and head studs is pretty inexpensive and will really help too. On the timing covers you won't need to remove the covers if you don't want to but can remove a couple at a time, clean and repaint and replace with new ones. Be sure to coat the threads of any new bolts that are not blind with Indian Head shellac to keep oil from leaking past the threads.
If you remove the nuts on the head make drain the coolant first. Always a risk of the head gasket leaking after replacing them but... it will look a lot nicer.