If it was me....

1) my first choice would be to do it right-- send it off for a faithful reproduction repaint and reproduction decals. Get the frame stripped, rust removed properly, and properly primed and painted. AND apply framesaver on the inside of the frame.

2) My second choice would be to go to an auto paint & body shop, and get the paint matched. They'll do it for about $40. Two colors like yours would probably be $80, but it looks like you only have nicks on the bue, so it would probably only be $40 for the blue. I'd get some for brush on application, and see if they could put some in a rattle can for me.

I'd also take proper photos of the decals, noting the dimensions and proper position. I'd then commission a new set of reproduction decals.

Meanwhile, I'd apply framesaver on the inside of the frame. Then I'd thoroughly clean the framesaver off the outside of the frame (it gets messy), as part of the prep for painting. I'd remove all rust from the frame, prep the frame properly, prime the bare metal, and do a rattle can job on the large area on the chainstay-- I'd probably just paint the entire chainstay, and blend the touch-up color with the original where the stay meets the dropout and the bottom bracket.

[EDIT: I just took another look at the chainstay, and realize now that I was looking at a chainstay protector, and not damaged paint. So it may be that all you need to do is touch-up work, which could probably mostly be done after assembly (the only exception being if there's a nick you can't reach after assembly). And of course, do the framesaver before assembly.]

Then I'd touch up any spots that I can't reach once the bike is assembled. I'd fill in the nicks with the brush-on paint, let the paint dry for a few days, then fill, let dry a few days, repeat, until the paint has filled the nick. Then I'd sand it level with the surrounding good paint, taking care to blend in the touch-up with the surrounding paint. Buff it out, and it's done.

Then I'd assemble the bike. Once it's assembled, I could take my time replacing damaged decals and touching up the remaining nicks.

3) My third choice would be powdercoat. It's inexpensive, and tougher than paint. The downside is it will take away the unique paint scheme that this bike has. I think powdercoat has its uses, and plan to powdercoat some beaters as well as some touring bikes. But this particular bike is one I would paint, not powdercoat.



And thinking about it, I think my second choice, while more labor-intensive than my first choice, would probably be the best approach, because it preserves the originality of the bike.

If you're serious about getting the bike on the road by July 4, powdercoat may be the fastest. Or maybe touch-up is the fastest, if the powdercoater cant turn it around that fast. A complete re-spray will be the slowest method, however. Personally, I would place the integrity of the bike above getting it on the road by July 4th, but that's just my personal choice. You may have reasons you want it on the road that fast. Still, doing the touch-up approach might get you there, especially if the only thing you have to do before assembly is framesaver and rattlecan the chainstay (and save touching up all the nicks and new decals for after the bike is assembled and on the road-- then you can do it at your leisure.). If I had to get it on the road ASAP, and wanted to preserve the integrity of the bike, this is the approach I would take.

And to second an earlier comment, don't cut anything off the frame, and save all your original parts (if you have them) for the future. You (or somebody else down the line) may appreciate that, even if you don't appreciate it all that much today.

Good luck!