1) 24 hour battery life as opposed to 14 hours.
2) 40% brighter screen than the 1st gen.
3) Casing not as scratchable as 1st gen.
That's about it really. I've recently bought a 2GB 1st Gen nano, reason being I'm never away from a PC for more than 14 hours so the battery isn't a problem. I overcome scratching by having a rubber case on my iPod. Also the screen is bright enough for me. The sound quality is exactly the same on both models.
If the 2nd gen is only £20 more, I'd go for that.