Bill,
Yes, the Palace is close to town, maybe 2-3 blocks. The reefs are coming back and saw more fish than the previous three times ago. In fact, we did Palancar Shallows and it was untouched by Wilma. You will not be disappointed in the diving.
They do have an on-site dive house, Aqua Safari, but we like to use Dive Paradise. They pick you up at the hotel dock around eight, take a fast boat out for two dives and back by noon. Fast boats are the way to go. We had only three divers and one DM for the whole week. Nice having the jaccuzi to rinse your gear and then relax.
Depending on what your wife likes to do, the Palace offers amazing services and information for shopping and tourist excursions.
Excellent food, drinks, service, 24 hour room service and the softest beds in Coz. Thats why we keep going back.
The only thing lacking at the Palace is a beach, but they do have platforms for snorkling. But then again the pool is very nice.
I will post a review of my trip in a few days once I have gotten caught up at work.
Hope this helps.
Dave (aka "Squirt")