Very sad news.
I really hate to say this, and I hope that I'm wrong, but... Since the transmission is otherwise OK, meaning it shifts fine through all the gears, then you must be looking at a clutch or flywheel problem.
Don't take the engine out on my account though...wait for other, more experienced contributors.
On their death bed, nobody ever said, "Gee I wish I'd spent more time at work!"
'68 Sprite 1275
'76 Midget 1500