I seem to always be at odds with Robin over this

- but I can't see not getting an HDV camcorder. You posted:
picture quality is most important
that's gotta be HDV - in your pricerange.
HD broadcast takes over in February 2009. I just read Best Buy just removed all analog (DV) TV's from their shelves. So if you don't have an HDTV, you soon will.
To me DV footage viewed on a big HDTV looks like a VHS tape that's been rented too many times. Unless you have HD upscaling somewhere in your system. I may be more critical than some but it sounds like so is your wife.
I also think with the latest Warner Bros. announcement that Blu-Ray is going to become the dominant format (70% of the film studios now support it) so that has to drive the price of HiDef DVD players even lower.
All this I believe limits the future use of SD. Except the better three-chip pro-sumer models. And imho, those folks are just trying to hold onto their investment a little longer. (I expect Billy to rebut this..lol)
A point to mention about the Canon HV-20/Ikelite housing combo. It will pan Backwards in the mirror. Ikelite only sells their reversing circuitry for Sony models. And you have to disable it to use the touchscreen functions with their HC7 housing.
The HC7/Ikelite combo is $2200 at B&H, The camera seems to retail for around $999. If you want the Gates housing instead, it's $2240 alone. So almost within your budget. Even if you bought the Ikelite, you're not going to get much in the way of lights for the extra $800. The Gates also allows you to fully open the LCD screen which is a huge plus viewing underwater through a mask.
I'm personally a big proponent of metal housings, they're lighter and stronger. A video pro told me once, drop a poly housing let it hit your foot to save it, drop a Gates move your foot quick. Full disclosure: I shoot an Amphibico EVO/HC1 so I may be biased.
If you're diving in warm, clear
bright water, I might go with the HC7. Or save yourself a couple hundred dollars with the HC5. Surprisingly it appears to have better low-light performance. Since the sensors have the same footprint, Sony reduced the size of the CMOS elements on the HC7 chip to make up the 2.1 vs. 3.2MP difference which degraded it's low-light performance slightly due to cross-talk.
But your housing choices change as Gates doesn't do an HC5 housing. Equinox is a mechanical option that does. Could just about get an HC5/EVO Elite housing for that money. Tradeoff is no MWB and it only has an SD monitor back.
You might also look at the new L&M Stingray HD. It houses just about any Sony HDV/AVCHD camera made. $1899. No MWB. (that I know of)
Conversely the HV20 was camcorderinfo.com's camera of the year. Read the reviews there for both models. I also like the new Canon HG-10 but it's an AVCHD/HDD model so the image quality is slightly less than HDV. Not sure anyone is housing it yet.
There's a bunch of new Sony models due out 3/14 - see my other post in this forum for details. So if you're not in a hurry...