£500 seems like a hell of a lot for a head gasket replacement to me. I had a quick look on some Rover forums and while it does seem to be a common fault, someone mentioned that they had managed to get a second hand engine from a breaker, supplied and fitted for £500. I'd ring round a few mechanics and dealers to confirm the quote before going down the replacement car route.

This site had a few links on it: http://www.austin-rover.co.uk/index.htm?r3indexf.htm
And this one has the forums: http://www.mg-rover.org/