Do you think I got screwed, or is it just part of the hobby?

From what you have said, it sounds to me like the machine shop is willing to work with you (at least to a point). They probably won't do all the R&R work to get the short block out but they should do whatever is necessary to get the short block back into specs. You can ask them about the rest of the labor, gaskets, oil, etc.....you never know, they might do that too. I think my first step would be to do what he asked. Pull the oil filter and cut it open to see if there is any metal flakes inside. Put a new filter and oil in the car and drive it over to him to get his opinion on the noise. Stop at some other shops in the area and get their opinion too. Next would be to pull the engine apart again and inspect it thoroughly. Make sure you have an agreement as to who needs/wants to be present when this happens. Once the problem is found, the one responsible can be determined and assigned to fix it.