The people that are denouncing this thread because they think the answer is "obvious" kind of piss me off just a bit. The answer is NOT as obvious as I think people try to make it out to be.
True, the 2G has some obvious hardware advantages: hardware volume toggle, external (if poor) speaker, faster CPU. But there is still one advantage to the 1G that, from the looks of it, will not be coming to the 2G anytime soon.
Jailbreaking.
There. I said it. The dreaded 'J' word.
A lot of people pooh-pooh the usefulness of this feature, but I think it's incredibly useful. It opens up another whole world of available software which I know has certainly made the device twice as useful to me as before (and no, I'm NOT talking about pirating App Store apps).
How about having a portable UNIX workstation in your pocket, complete with shell? How about the ability to use the iPod as a storage device, like all other iPod models before it, without having to pay somebody else extra for the privilege? How about being able to make your iPod your own with tweaks and customization options that are not exposed in the normal, overly restrictive firmware? How about the ability to MULTITASK multiple applications, such as listening to internet radio via Pandora or FStream while simultaneously browsing the web in Safari or looking at Google Maps? Oh, and speaking of Google Maps, how about STREET VIEW on your Touch? There's a Cydia package that enables it on the 1G Touch firmware. To use a Steve-ism, "that's huge."
The iPhone/iPod Touch hardware and software platform is amazingly powerful and has so much untapped potential, a good portion of which CAN be tapped by the jailbreak that works on iPhone/iPhone 3G/iPod Touch. It really is too bad that Apple's near-fascism doesn't allow them to expose the power and flexibility of this platform to its users by default, instead requiring that there is this ridiculous cat-and-mouse game between themselves and the hardware and software crackers out there. I'm sure the crackers enjoy the little game, but the poor users get caught in the middle of this fight. I know that I will most certainly never buy a 2G until a method to jailbreak it is found. (So, Apple, if you want some more business from me, you know what you need to do...)
ALSO, as an aside, I should mention that the fact that you can do voice recordings and VoIP on the 2G Touch with its newfound "microphone input" abilities is NOT an advantage that is exclusive to the 2G, contrary to popular understanding. True, the 1G does not have audio input abilities built into its headphone jack like the 2G does, but one thing that Apple DID do right with the release of the 2.2 firmware update is ALLOW for "Made for iPod" certified microphones that connect to the dock connector to work on the 1G Touches now. I can personally confirm that on my 16GB 1G Touch, a virgin (un-modded) MacAlly iVoice III plugged into the dock connector WITHOUT a jailbroken OS works perfectly fine with Fring and other voice-enabled apps. Furthermore, the App Store restrictions on downloading certain voice-enabled apps to the 1G Touch are entirely artificial as the apps work just fine with the iVoice on the 1G, too...I jailbroke my Touch, legally purchased Ocarina from the App Store on my computer through iTunes, and then manually installed Ocarina to my 1G jailbroken Touch, and I was playing Ocarina through the iVoice with NO problem whatsoever. I tried a handful of other apps that are supposedly "not compatible" with the 1G Touch, and they all worked perfectly well, too.
If anyone wants more details on the iVoice solution for the 1G Touch, you can go over to the ipodtouchfans.com forum and search for my posts there (same username on that forum as on here: 'NathanA').
-- Nathan