ATV2 has built in Netflix streaming (in the US and maybe Canada)
ATV2 can playback at higher resolution (720P vs. I think 520P)
ATV1 Allows you to purchase movies, tv shows and season passes through iTunes store directly from the device. ATV2 only allows rentals, although if you make purchases through iTunes on your computer, they will be available for streaming once they download to your library.
I have both, and I have found that for STREAMED content, the ATV2 is better. For content that is actually synced to the ATV1, I see it as equivalent to the ATV2 streamed version - however, a lot of my content was ripped & encoded for the ATV1, so I'm using lower resolution than the ATV2 could provide.
If you can use Netflix and have a fast broadband connection, that's the killer feature. If you are just trying to stream your existing iTunes content, there's little difference.