I voted for the first-gen (2007), because it's all been incremental (but significant) changes since then. The first-gen showed what a mobile device could be, and nothing else was even comparable to it until then. Walking down the history in my experiences:
The announcement of the App Store was what convinced me to go ahead and get the first-gen iPhone. This was such an amazing device, even with it's shortcomings and missing features. I actually like the look of this one the best.
The 3G was minor upgrade, basically the same hardware just adding the missing 3G and GPS and adding video in the software (and better camera I think); I ended up getting it because I wanted to pass my 2007 down to my T-Mobile-using girlfriend (now wife), otherwise I would've waited.
I got the 3GS next and that was a very significant upgrade even though no cosmetic changes -- the additional processing power and RAM enabled a whole new level of performance. I think this is the most underrated upgrade; people saw it looking like the 3G and didn't think it's worth it. But the performance increase completely changed the usability of the device for me. I was able to use it in ways I couldn't use previous iPhones.
The iPhone 4 came out with the retina display. The retina display was a very obvious and expected upgrade, considering that other devices already had higher res displays (or maybe I only say that because of the leak?). Still, it was very important and greatly improved the iPhone experience, and kudos to Apple for how they transitioned to it. I saw the glass back and thought "what was Apple thinking?" and I still think that it was a bad choice. Front-facing camera was badly needed at this point, as was the flash. I skipped this upgrade.
The 4S is an improved version of the iPhone 4. I got this upgrade. The camera was quite a step forward (maybe I only say that because I skipped the 4). This device is orders of magnitudes more useful to me than any of the previous iPhones I owned. My use of my iPhone is now firmly integrated into my life. As an aside: I think iOS 5 was the best iOS release, which coincided with the release of 4S.
The 5 improved just about every aspect of the device, except for the rear camera (which is just a thinner version of the 4S camera). But even so, the only really significant changes that people take notice of is the bigger screen. I think this is the first time there are no iOS features that are exclusive to a new iPhone during launch. I am perfectly ok with skipping this one for the next iPhone (I'm not due for an upgrade anyway).