As a mechanic, I'll play devil's advocate. First off, your 'BS' diagnostic charge. Does the Doctor look at you for free, and only charge you when you do work? No. Same thing with a mechanic. Most of them are payed on Flat Rate. Means, they only get paid, when you pay the repair shop. If they tell you a water pump takes 1 hour, and the tech makes $10/hr. He changes your water pump and it takes him 1.5 hours, he only gets that 1 hour, or $10. It's possible for him to only get paid for working 20 hours in a 40 hour work week, so yes they have to charge you a diagnostic fee. Most 'real' repair facilities won't even look at a car for less that 1/2 hour diag charge, and that's for thing small and simple. If its rough running or etc, one hour is industry standard. If the tech looks at the car for one hour, and still does not know what's wrong, you have 2 choices pay more for more diagnosis, or come pay the diag fee and get your car. Doesn't mean it's fixed.
As for the price of the cat. Where was the cat? Most new cars have the cat built into the exhaust manifold, to heat the cat up to operating temp quicker per EPA standards for ULEV, TLEV and other emissions requirments. That $880 probably included 2-3 hours time to R&R the part so at $80 an hour (that's average) and 3 hour labor, $240 of that is labor cost. Leaves $640 for the part alone. Most likely they had no choice but to buy this from the dealer. We all know dealer parts are expensive, and if infact it was built into the manifold, that's a very good price, believe me, very good price. Don't forget misc clamps and/or gaskets.
As far as the emissions warranty, how is the individual shop supposed to know? Some magic warranty fairy comes around and tells everyone about it? No, independant shops that deal with every make, model, etc don't worry about warranty. They can't, it would take too much time. Infact, they have no way of knowing if a car has an extended warranty, factory warranty, tire warranty, or whatever. They have no way of looking that information up, for one, because it changed almost year to year with what was covered and not covered. Independants usually find out about these warranties from techs that come from dealerships into the independant world, and inform their managers about such warranties. The second part of that, is it is the car owners responsability to know what their warranty is, maintenance schedule is, and how to operate their car, period. It is not the repair facility's job to know this information, and like I have said, they can't. You have no idea how many owners manuals I look through that have never been opened till me.
I suggest you take your car to the dealer even after the warranty is up (at least till the vehicle is maybe 5 or 6 years old). Recalls get done, even if you don't know about them. Tech updates to parts, where Joe Schmoe Independant might R&R your thermostat, but if the dealer has an updated part noted in a Tech bullitin that never sees the public, Joe Schmoe is just replacing your part with a predated one. You end up paying for it again and again until somewhere down the road the updated part makes it in the right hands. It might take NAPA 3 years to update thier parts.
KY Chris, this kind of slander is what gives mechanics a bad name. When in actuality, I see nothing wrong with what happened. The only thing that could have been improved upon, is if the repair shop knew about the 8/80 warranty. But I think I have beaten that dead horse already.