I have used it underwater. It works fine underwater but it is does not have any manual control so it wont work very well with a strobe. If you know you are going to get a strobe, go with something that has a manual exposure mode. Once you add a strobe you loose the advantage of it's small size, so you might as well get a larger camera that is full featured.
The reason you need manual control of the camera to use a stobe is because the camera is not expecting there to be a stobe so it sets the exposure as if the stobe was not there. The "stobe" that sony sells for this camera for underwater use is actually just a waterproof flashlight. A regular C or D cell divelight will work better.
The T1 has the most impressive macro I have seen in any camera. You can literally touch your subject with the camera and it is still able to focus.
I have not seen any P&S camera that works well in low light. I would estimate that the T1 is average in this respect.
Red eye is not much of an issue in the water because you wont be using the flash for anything but macro. Any camera's internal flash is going to cause horible backscatter and shoule only be used at ranges less than 1ft. The flash is plenty powerfull for use in this range.
The camera is perfect for snapshots to email friends or print out 3x5's for a photo album. You can strap around your wrist and forget about it untill you see something that catches your eye. If this describes you the camera is great, if you are looking for magazine quality pictures to print out bigger than 8x10 you need a camera with manual control and a stobe(s).