In August, there will be plenty to do here! It is our busiest time. Lots of nightlife, bars, restaurants with great beaches and a historic town which retains its Portuguese character, unlike several towns along the Algarve.
In the daytime, you can explore the West Coast towards Sagres with its rugged coastline, hidden beaches.
To explore anywhere in the Algarve outside of the towns, a rental car is advisable. (If you are from across the pond, remember to specify an automatic shift as most hire cars here are manual shift.)
If you only have a week, spend three days in Lisbon en route, a day travelling to and from Lagos, and three days in Lagos or a combination thereof.
For travel info on how to get to and from Lagos from Lisbon, have a look at the articles on my blog under this link:
http://barlaventostravelblog.blogspot.com/search?q=Lagos
Also have a look at this article on wikipedia:
http://en.wikipedia.org/wiki/Lagos,_Portugal
I was recently chatting to some OZ and US backpackers staying at one of the hostels here and they reckoned that 3 to 4 days is an ideal time to spend in Lagos.
