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98 Honda CRV Head Gasket - Is it blown?

My CRV started steaming at the stop light yesterday. I immediately pulled over and had it towed to the dealership.

It was as I suspected - the radiator hoses.

$325 to change those! They then called me to tell me the head gasket had blown and they have to grind the head and replace it. Bringing the bill to $1200. First can this blown head gasket ruin my engine by mixing in the oil? How do I know that this is in fact what happened? The car had been running perfectly. Is this extra $900 a common price to do this repair? Oh and the car has 164,000 with all scheduled maintenence done as required.
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