+1 for dynohubs, and while i haven't tried the (super-expensive) schmidt dyno, my shimano dyno works great, with minimal drag. did 161 miles a few weeks ago with it on all day, and never really noticed the drag at all.

i use a (halogen) schmidt E6 lamp, it's plenty bright for me. and soon i'll be wiring in a tail light too!

hooray for self-powered systems, i say screw batteries.