Danang Seafood Phuket
Update August 2008 - Danang Seafood is closed. But never mind, next door is Kan Eang 2 Seafood, which is still a decent spot.
Danang Seafood is a place we have eaten many many times, one of many seafood restaurants around Chalong Bay. Right next door is Kan Eang Seafood. These restaurants are close to Chalong Jetty. The entry road is just a couple of hundred meters down Chao Fa road from Chalong Circle (towards Phuket Town).
Danang is hardly ever busy unless they are doing a wedding or something, and it does tend to be more locals eating there than tourists, though its not as "local" as the seafood restaurants near Phuket Zoo (such as Palai Seafood, Tang Kae Seafood, Pran Talee Seafood) or Laem Hin Seafood on the east coast. There are tables right by the sea and others undercover, though still open air. We will normally go for a seafront table, though the lighting is a bit dim at night. The view is over Chalong Bay, lots of boats, Chalong Jetty and some of the islands.
The food is good, inexpensive, service is normally fast. I'd say don't eat the beef - always seems to be very chewy, but anything with fish or prawns is good. I tend to eat things like Thai salads (Yam Gung Seab is a favourite - dried shrimp salad), but a whole fried fish with lemongrass is a nice treat! There are also chicken and pork dishes, but not a lot if you are a veggie. Sitting there with a satisfied belly and a cold beer looking over the bay is relaxing and peaceful.
I always suggest people get off the main tourist beaches sometimes for lunch or dinner, it can be worth the effort! Phuket is still 10% tourist, 90% local. You don't need to go far, but you do need to go!