1. Staying in Bali. I stayed in Nusa Dua. Although the hotels were really nice I think for me Kuta/Legian/Semenyak would have been a better choice. More life, better beaches and more to do. Not that Nusa Dua wasn't nice it's just a little bit far from the "action".
2. Diving. Not the best time but the north west corner is THE place to dive. Amazing critter diving ala Lembeh. I dived Tulamben which was above average and enjoyable, don';t miss it, it's like the reef fish are on steroids. Nusa Penida is also good but currents are a concern if you don;t have sufficient experience. I found the book Diving Indonesia a good reference book with lots of info on Bali diving.