I would like to visit Burano, Murano and Torcello islands. Can you give me recommendations for things to do and see, and places to eat that serve local specialties and are not overly touristed. Also can you recommend inexpensive places to stay in Venice and Burano.
Risk Steves' Venice book has a perfect day-tour to the three islands; We have done it three times. It takes us about 6 hours with lunch, so it's a full day. Be sure to buy a vaporetto pass! We like a place Rick mentions for lunch on Burano, Al Vecio Pipa. Touristy? Yup. especially in high season, but everywhere is "touristy."
Inexpensive is very relative, a personal opinion. We shoot for €100 per night on average. In winter I can do that in Venice; in high season it is harder. We liked this B&B, but have also rented apartments thru VRBO.com and Booking.com.
Venice and Burano are close enough to stay on one or the other. Be sure to buy a vaporetto pass to make travel to the islands easier (scan the pass every time you board). Burano has great shops to buy original glass pieces - many artisans have workshops and sell their own work. If you are looking for lace, make sure it's made locally (lots of souvenir-type shops sell stuff made in China). Burano's cathedral bell tower leans a little. Torcello is my favorite island, see the mosaics at Santa Maria Assunta. Harry's Bar has a restaurant there as well as in Venice proper.
I usually stay in the Canarregio area but other posters will have lots of recommendations.
If simple is ok, I recommend checking Hotel Doni. It's a few minutes wak from San Marco on a quiet side canal. I really like it. The owner is very nice; takes my luggage upstairs without me asking, and was really helpful when my credit card was stolen on a vaporetto. I always get an en suite room, and paid 80E last fall. The shared bathrooms are much older.
In March 2011 stayed near San Marco at Hotel San Giorgio. We got a very good price as we booked well in advance through booking.com and took a non-refundable rate which was at 50% of the normal price. Earlier this month we stayed in Canarregio at Hotel At Leonard, an annex to Hotel Bernardi Semenzato. Being February and before Carnavale we paid about 71euro per night and had a large and beautiful room. You don't mention when you will go but the prices will be much higher in the high season.
If you're interested in local specialties you could try one meal of ciccheti - small plates. We like Cantina do Spade in San Polo.