Where to start with a rusty block?

The 7 means that it was the 7th batch made on a single mold. That's a pretty high number. I don't know how many batches were generally made given a particular mold before they made another mold. Some say the lower numbers are better, but I really don't think that matters.

As far as bore size, the 340 is 4.040 standard, so if it is .060" all is not lost. For the 340 block, it may can go further, you will need to have it sonic checked to be sure.

As for the rust, take it to a competent machine shop and they can clean it right up.