I've owned (okay, leased through my company) both. An '05 and now an '08.
If you mostly drive on-road the ride and handling on the Gen 2 is worlds better.
If you want to off-road then a Gen 1 is better because it has better ground clearance stock, most have front tow hooks, a t-case skidplate, and you can get a fuel tank skidplate from Ford (although you can get a fuel tank plate for a Gen 2 also, it has no t-case plate).
A Gen 1 may have a limited-slip rear axle. The Gen 2 did not offer a limited-slip at all and has traction control instead, which makes the engine take a crap when all four wheels are in deep snow. You can turn it off but then you have open axles front and rear.
You can lift a Gen 1 with a body lift, a 4" kit from Superlift, or a 5" kit from Dixon Bros. Period.
You can lift a Gen 2 with a 2" Truxx spacer lift. Period.
All Gen 1's have a 4.0 SOHC V6 engine, manual trannys are out there but not many.
All Gen 2's are automatics, most with the 4.0 SOHC, V8's are out there but not many.
Gen 1's do not have a factory trailer hitch but you can add one (I did) or use a bumper ball if you're towing something light.
Gen 2's come with a factory Class II hitch (lightweight) and a factory Class III was optional.
Gen 1's have a solid rear axle and the Ranger-style torsion bar front suspension with shocks that are way too soft and should be tossed in the garbage and replaced immediately.
Gen 2's have an all-independent suspension with coil-over shocks and handle like a sports car by comparison.
'03-'05 Gen 1's have 4-wheel disc brakes, all Gen 2's have 4-wheel discs.