Spend some time at the Scotsman, a small pub on the Diamond (town center). It doesn't look like much from the outside but it's nice inside...There's music every night provided by the pub owner, his wife and guest musicians. the locals at the bar are friendly and colorful. But order beer because the mixed drinks are suspiciously weak!
Visit Donegal Castle which is beautifully resored and look for Red Hugh's treasure! It's on the Diamond.
There is another big pub that over looks the river at the south entrance of town (sorry i forgot the name, left side of the street) that does a really nice buffet that's good for lunch. The only food we found late (offseason) was a take away down the street from the the big establishment hotel (Abbey Hotel i think) that does most of the tourist bus traffic. (I would avoid that place) but there is an Italian restaurant next door to the Scotsman that was recommended. Some patrons got takeaway and brought their food into the Scotsman.
The inn i could recommend is St.Ernan's just a little south of the town (there are signposts) It's expensive but beautiful, across a little causeway in Donegal Bay...make reservations online before you get there. They do an elaborate breakfast and often dinners during season and the rooms are beautiful if maybe overpriced.
There's also a great bakery with an internet cafe above on the Diamond.
One place to avoid is the Green Gate B&B in Ardara. We found the rooms dirty (mold on the shower walls) beds not that clean and in general an attitude that if you didn't like the dirt there was something wrong with you because you are a "spoiled american." (!)
Donegal Town should not be overlooked for a morning or afternoon visit. It has some nice shops and the Donegal Castle is in walking distance from the town square.
It is also a good place to get your Traveler's Checks cashed at the local bank, postcards sent etc.