Toyota Repair: 92 Camry Overheating, coolant leak, head gasket

Question
I have a 92 Camry wagon that recently had the temp meter go up into the red briefly.  Coolant seems to be disappearing but there is no smoke or fluid leaking out the tailpipe etc. and the oil looks fine.  After a new thermostat and water pump the dealer now says it's a probably a cracked head.  My question is should the dealer have been able to diagnose this without replacing the water pump and thermostat (and timing belt) for $800? Or is this just an expensive process of elimination?

Answer
Maybe a cracked head but more than likely a blown headgasket, the problem seems to have been misdiagnosed, it's hard for me to say whether a failing water pump may have caused the overheating and the subsequent head gasket or cylinder head failure or whether there was actually a reason to replace the water pump without diagnosing for a possible headgasket problem first, in other words I have no idea which problem came first but to answer your question, yes, the dealer has the ability to check for the internal combustion leak as a first step. Water pumps normally start to leak when there is a problem, they almost never fail to the point where they will not pump water anymore unless there is a coolant leak in which case the pump runs out of coolant to pump which causes overheating, I hope this clears it up for you.