A week is quite short. I would probably just do Snaefellsnes, the Golden Circle and the route along the south to Jokulsarlon given that time. That would give you a pretty wide variation of landscapes. For an idea about the landscapes, take a look here, link
As far as accomodation goes, cosy is expensive in Iceland. We contented ourselves with functional and spent our money on more days. There is an association of farm guesthouses that are nice to stay at. www.farmholidays.is/ Some of the farms also rent out privately, which is cheaper, but then you need to contact them individually.
Mark, I'd check to see what's open (i.e. roads) in May as I understand there still quite a bit of snow even into June especially in the back country. I'll have to check myself as we're thinking of going there too.
We've heard that Iceland is pretty expensive, but haven't yet much of an idea how expensive... We are prepared to spend a bit of money but then again don't want to have to break the bank.
If money is a problem, you could consider hostels. link. On our last trip we alternated hostels and guesthouses. If you book early you can get private rooms. The advantage of hostels is that they all have kitchens, so you can cook you food and avoid the expense of restaurants. There are also some guesthouses which have kitchens.
When we visited Iceland in late May/early June 03 some of the interior roads were still closed limiting us to mainly the ring road around Iceland and coastal areas. Weather we experienced was variable and at times cold and wet, take layers of clothing. Many places worth visiting and great photo chances of mountains, coastal scenery, waterfalls and volcanic features. In 03 prices were high in Iceland, we found it cheaper booking bed,breakfast and evening meal rather than eating out. Take a variety of focal lengths.
Mark,
If this is your first trip to Iceland, the ring road offers a lot with little effort. The farmhouse B&B's, as noted by hellenica, are great. We found them cozy, friendly, and the food was great.
There are a million pics to take there; enjoy!
David
150-200 euros a day for lodging is not bad for 2 people. Assume you would be renting a car? gas is pretty expensive two months ago it was at $2.19 per liter.
I would suggest taking a trip to jokulsarlon on the way to the glacier lagoon you will also pass Reynishverfi Beach, Mýrdalsjökull, Eyjafjallajökull, Skógafoss, Seljalandsfoss and Svatifoss... http://500px.com/photo/14282871 (which to me is the most worth it of these waterfalls).
For the rest of the days, I assume you would be aurora hunting at jokulsarlon, I suggest a trip to pingvellir national park, then on to snaefellsnes to see kirkjufell and the black church of budir. its a very nice area to explore and catch aurora as well.
personally I would do the highlands, and the western fjords as well but there looks to be no time left to squeeze those in.
I am also thinking of doing a similar trip - unfortunately I haven't done much research yet but I've bookmarked this so will share anything useful I find with you
