The first thing people will notice: the 2nd gen iPhone will be about the same size and shape as the first gen.
It will, of course, have 3G. And proper GPS!
The most noticeable physical difference is back of the phone is no longer metal -- the whole thing is glossy black, from top to bottom. The volume buttons are now chrome.
Because it's got a little less metal to deal with, it doesn't have quite as many angular edges. The battery is (still) not removable.
The phone itself will be slightly thicker than the first gen device.
The headphone jack will no longer be recessed, and will finally be flush with the body.
The device itself uses roughly the same size and resolution screen as the first generation product.
No solid word on battery life or storage capacity.