We lived in Marthon for 6 months in 2009, spent 3-4 nights a week in KW.
We would usually go to Conch Republic Seafood Company on Greene and Elizabeth, Caroline's Cafe on Duval, or Salsa Loca (behind/next to Cowboy Bill's) - none of them are high-end places, but good food and budget friendly.
When we felt like spending a little more, we went to red fish blue fish a few times and enjoyed it.
IIRC you can pick up some fresh boiled shrimp at the shrimp docks just after the boats come in as well.
If you will have a car, Hogfish Bar and Grill one island north was always good.
We were usually too busy working during the day to give input on things to do other than eat and drink. Make sure you go to the sunset festival at least once while you're there. The assessments about snorkeling/diving being better further north are pretty accurate. The boats out of KW are typically more the "party boat" type of excursion, designed to serve cruise ships more so than marine biology enthusiasts, but there are a few charters that can be had on the island.
Where will you be staying?