If the engine case is good/rebuildable, you can probably rebuild it for $700-$800ish. I rebuilt mine last may/june and I was very thrifty and shopped around. I bought alot of new parts from vendors at the shows to get good deals and save tax and shipping. I bought other parts at local suppliers. The hardest part will be the machine work and assembly. If you don't have someone to help you, get the Tom Wilson book How to rebuild your VW engine. I used to buy parts near the Zoo when I lived I knoxville. I think it was like Randy's Imports or something.
If you are willing to travel, our godfather does machine work for the club, but he is in chattanooga. Knoxville has a good club with plenty or resources, but don't let that stop you from keeping up with our club!