What kind of camera and how much you spend on it is an intensely personal thing. No one can make that decision for you (unless you are married or a sugar daddy). It really has to come down to your wants, your needs, your priorities and your budget.
Note that you can actually get some decent pictures with very inexpensive cameras.
This picture of an Angelfish at the bottom of this post was taken with a "disposable" camera. I put that in quotes because it turns out that the camera actually is reusable; you can replace film and battery. It cost me $19.95 in Key Largo, but they were selling for $15.95 in Boca Raton. I used it on several dives on both coasts. I bought the version with a flash, that could be used down to 85 feet. I have seen them on eBay for $12 - $15.
However, I wanted better pictures, so I upgraded to an Olympus and a housing. It was a cheap investment so that I could try taking some pictures underwater before I spent a bunch of money.
As stated above, there are some serious benefits to digital. I think the most important are the elimination of film and developing costs, and the immediacy.
Being able to display your images to friends right away is really cool, but being able to see if you got the shot or if the exposure is correct before you move on is critical. I cannot over emphasize the value of that. If you know right now that you messed up the shot, you might get a second chance at it. With film, oh well.
However, there is one big downside to digital: Shutter delay. There are ways to minimize the delay, but most cameras today will have some amount of delay. Be prepared to get a lot of pictures of "fish but" (spelled to bypass censors). If you don't know what that means, you have never used a digital camera or talked to anyone that has!
There are a LOT of people on this board that give strong testimonials for the Olympus series of cameras and housings. For me and my buddy, it was less expensive (and less risky) to buy a new compact Olympus camera and housing than it would have been to have bought a housing for one of the existing SLRs that we own. (I have several Minoltas and he has several Nikons)
There are other brands and models that can be purchased at a reasonable prices. I cannot speak about the others because the only one I know is the Olympus. One major advantage to the Olympus is that there are a LOT of users on this Board that can provide a LOT of help and guidance if you get one.
For many cameras these days, the built in flash actually does a pretty good job. After using a camera for a while, if you are serious about it, you will want to add a strobe etc. Remember that you don't have to buy everything all at once. If you aren't sure how "into it" you will get, then you should start out with a minimum outfit and expand over time.
One last thing to consider: many digital cameras these days also have the ability to take (low quality) video clips. This can come in handy above and below the water line.
To get an idea of how much you want an underwater camera, and how good the quality needs to be for your tastes, take a look at what camera you use above water, and what pictures you are satisfied with. If a simple compact camera fills your needs above water, then maybe the same will be okay underwater. If you have a high end SLR and you demand great pictures from yourself, then you want something good quality for underwater.
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Advice:
If you are not sure whether you will enjoy underwater photography, then I suggest that you try a "disposable" with a flash. If the pictures from it are adequate, then keep using it. If you decide that taking pictures hampers your diving, then stop.
If you decide that you want to continue, then examine your budget and go from there.
I recommend Olympus as detailed above. Others will recommend others. Compare costs and features.
There are opportunities to purchase refurbished units, and that can be a way to save some money. If you keep your eyes open, and watch for deals, you may be able to get some good prices on new gear. Watch for when new models come out, then pick up the old model for a lower price!
Get something you can live with (we can never truly justify any of these expenses) and then go use it to death! Then share your photos with us!
Wristshot