You will not find a machine with a 5x7 hoop and sewing capabilities in that price range I'm sorry to say - unless you find an older machine (which might not have the features that you want - and yeah, that needle up down is sweet!)
In the under $1000 category with a 5x7 hoop (you won't get a larger hoop than that unless you almost triple the cost) is the Brother and the Janome 350e - the 350e is iffy on the cost though. It's more expensive than the Brother but if you have a dealer near by you might be able to do some dealing there.
I would suggest getting two machines - one for sewing and one for embroider. Having the combo units are nice for space however just sitting, watching an embroidery machine stitch out gets old quickly.. You will probably want to double duty and sew at the same time ;)