I was there about ten months ago, stayed at the Westin Casuarina and dove out of the Red Sail Scuba facility --- all a bit expensive, but it was a meeting trip and deductible. Red Sail has very nice boats and a nice staff and the Westin is fully operational. One word of caution, in that not everything has been repaired to full throttle and the dive operators and hotels may not be forthright on the phone or on-line with how they are coping since the hurricane.
Example: I wanted to play a round of golf on the main course within walking distance of the Westin...the website makes it look just fine. As I was taking a shuttle bus to do the north Stingray dive, I noticed no golfers. Oh, the driver replied, the course is ruined and won't be playable until 2008. Likewise, I saw diveshops boarded up (with still active websites) and one operator, whose webpage still advertised two boats, was down to one small boat.
Sunset House is just fine... I went to do a shore dive there, but the seas were too rough that day and they weren't letting anyone in the water. The facility is fine and fully operational and it looks like a great place (with reasonable stay/dive packages). You don't want to do too much travelling on the island because traffic is awful! It took me an hour to get from the Westin to Sunset House on a Saturday by cab, only a few miles away.
Thus, staying and diving at the same place is a plus and Sunset house is within walking distance to most of what you need.
And stay away from Cayman's air if possible. My own experience was bad and, when I return next march, its USAirways all the way.