I am not an expert but I was very lucky to see northern lights in April 2007. I was in the Myvatn area in northern Iceland, in Reykjalid to be precise. Somebody had told me that if you see white smears in the afternoon (a bit like airplane marks but wider) it can be a prelude to northern lights. I went looking for them every now and then at several times of the night, but that time I saw the white smears in the afternoon I went out at 11pm and saw northern lights for about half an hour, all around and above me! It was amazing! Colourful 'clouds' changing shapes and curling, others looked like falling particles, another one looked like a beam of a space ship coming towards me. You keep questioning your own eyes!!
I photographed them using my SLR camera, it needed exposure times of about 20-30 seconds. See my Iceland photo album. I had perched my SLR onto a fence using a tiny flexible tripod.
The photos turned out somewhat greener and brighter than what my eyes actually saw (for example the green curl, I saw as more of a yellow-green curl with my eyes).
After that I went out looking for more northern lights every night at different hours when there were no clouds, in different locations in eastern and southern Iceland, but never saw any more.
Every time I read about people having seen them in Iceland, it's usually in the north. So if you can, fly to Akureyri and try to stay in the Myvatn area or some other cool place.
I don't know about those expensive northern light tours from Reykjavik... on the one hand the locals probably know best which time is good and how to get away from the city lights. But on the other hand you might as well get a rental car and drive out into a dark place yourself.
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