Yes, the machine works again and I am happy with it.
After 8 loads of laundry, the agitator shaft is moving freely and there is no water leaking out the bottom of any part of the machine (and never has been). The inner drum seems to move in spin cycle as smooth and free as it ever has.
The agitator shaft inside the transmission is no longer protected by a telon surface in the bearing area. So I wait and see how long it takes for the shaft to freeze up again.
I have put in an order to my local used appliance parts guy for an agitator shaft in good condition. He says on average a week before he scraps a unit with same transmission.
My machine looks like new compared to the one in your pics. No rust; clean. It is used in a dry minnesota basement; 65 degree F year round. Lid always open when not in use.
Willie had good insight to the problem; small amount of agitator shaft seal leakage over long period of time could cause this problem. The question is how much water leakage will it take to get the transmission wet. I calculated this using published tables for volume of water in liquid and saturated air states. It turns out that the air inside the transmission at 65 degree F only needs one fifth of a drop of liquid water to become 100% saturated. With the temp changes during/after use, there is no doubt that there always will be condensing water inside the top of this transmission. I doubt that one fifth of a drop of water will ruin a well greased drum bearing.
Thanks Willie. I feel safe that the drum bearing is OK, and will closely observe the agitator shaft in the future.