Replacing a head gasket is in the high hundreds in the SF Bay Area. Sounds like your estimate includes a pretty extensive refurbishment of the head and a few other things.
I got a quote of something like $2000 for my 91 300SE. That was to replace the valve guides and everything that entails. Basically a valve job. This was a shop in Mtn View.
I haven't found a shop willing to just replace a head gasket if you can't prove that a valve job was done in the last 50K miles. They don't want you coming back complaining of oil consumption.
There is a shop in Redwood City recommended to me by forum member Ron Johnstone (sp?). He was willing to replace the head gasket but assured me I'd be back for more work shortly after. Very nice folks to talk to but not a lot of S55s and CL500s in the shop if you know what I mean.