I just got back from Key Largo last week. Stayed at a place called Bay Breeze Motel. You can find them on the web. I thought it was an excellent place. Simple, small, clean, family run, and the price was right - $99 / night. It was about the cheapest place I could find and was surprised at the place. The room I had had a bedroom, bathroom, and kitchen/living room area with a futon.
As far as diving: I dove with Dixie Divers, who are actually partnered with Paradise Charters. Totally excellent service! However, all their dives were with escorts, which was a good/bad thing. They were very good to point out stuff I usually miss, but I didn't have the opportunity to just do my own thing.
I also dove with Conch Republic Divers. I would recommend them as well. They were very accomodating and flexible.