Iceland is amazing! I was there in June 2007 and it was great. Sure, go to the Blue Lagoon, and that's fun, but it's just like a spa. Granted, there's lots of European man flesh there to see that you probably won't be able to see anywhere else, as it's usually too cold for people to wear shorts, etc.
If you're there for a short time, do the "Golden Circle" which included Gullfoss (Golden Falls, you can see a picture of them in my profile), Geysir (where we get the name for a geysir like Old Faithful at Yellowstone) and finally Althingi, the original parliament from 974 (as Caslon mentioned). The most amazing thing about the place is the landscape. The more you can travel there, the better.
Next most amazing thing is the people. They are very nice and they all speak better English than you do. They are very friendly and nice. There aren't all that many of them (only 308,000 total) so I guess they all tend to get along.
There are two small gay bars in Reykjavik, the one I went to was called Q Bar. The gay thing isn't as big a deal there as it is in other places. It's decently well accepted. Two of their biggest pop stars are gay.
When I was there, it was very expensive ($35 for a personal pizza and beer, $10 for a piece of cake at a cafe), but the financial troubles might have changed that a bit. It was ISK62=US$1 when I was there, but I just checked and now it's ISK225=US$1, so if they haven't gone up on their numbers too much, it might be a little more affordable, but I would always assume it's going to be high. Do stock up on things at Keflavik Airport.
I definitely want to go back to Iceland, I'm jealous!