In reply to jethro kiernan:
Repeating a few things which have been said already. I have been to iceland for a couple of short trips, once christmas for a week and once October half term.
The roads off Highway 1 will almost all be sheet ice/snow (they don't grit the roads with salt, just plough them flat). We had a 4x4 with winter tyres and got blown off the road along the south coast by a strong cross wind and ended up in the gutter we also spun off on a steep descent, both times we were only doing 5-10mph. We wouldn't have got to half the places if we had a 2WD. We got a jeep from geysir rentals which was great. If you can get studded tyres that would be even better, but I didn't find anyone who hired them out.
We found it really hard work looking for the northern lights ourself. Have dinner, sit around, go out to a really cold dark spot. Sit in the car, set up the camera, wait, take some night shots, wait, wait, get bloody freezing, wait. wait, nothing, drive back to hotel in a snow storm, blizzards and drifts blowing across the road. Get back at 2-3am happy to be alive! We tried a couple of times, then gave up and ended up on a cattle bus of a coach tour, still didn't see anything but it was a lot less stressful.
Best day walk we did was to a hot river
http://www.afar.com/places/hveragerdi-hveragerdi-2 it's a brilliant walk and you can take a small sledge and sledge straight into a (fairly shallow) hot river.
Best thing about getting a hire car was that you can get to the main tourist spots (google golden circle) before 100's of people turn up on a bus tour, and when you get to Geysir, you can take a small walk and just watch the chaos from the top of a small hill, it's beautiful to just go 10 minutes away from the honey pot and watch all the people milling around the geysirs.
Take micro spikes for your shoes. Sometimes you can't get out of the car without them, sheet ice + wind is very tricky to get around to look at waterfalls etc.
Skogafoss was a particular highlight for us, take all day and walk along the river above it, you will have the place to yourself.
http://www.tripadvisor.co.uk/ShowUserReviews-g608884-d555031-r219006412-Sko...