FfH2 should definly be the recommended version. FfH1 was the version we put together before the SDK released so its feature set was limited to just xml and python changes. Once Firaxis released the SDK and we had source code access the gloves were off to really dig into the inner working of Civ4.
From a player perspective the focus of the "Light" phase of FfH2 (the phase we just completed) are two things:
1. A working spell system. Three schools of magic (divine, sorcery, summoning), 14 spheres of magic (fire, entropy, nature, etc) and three ranks for each sphere combine to give us a variety of 118 spells and abilities (rank 3 divine fire spell = Pillar of Fire, rank 2 sorcery entropy spell = defile, etc).
2. Civilizations that are much more diverse than typical Civ4 civilizations. Focus here is on making them play differently than each other at a core level, rather than just differentiating them by a Unique unit or building. We have added 12 new traits, and changed the game rules for certain civs. For example the Ljosalfar can build in forested tiles without destroying the forexts, the Khazad's productivity is strongly influenced by their wealth, the Kuriotates can only have 3 real cities, but they are huge "super cities".
Those are just the major features on top of what was developed in FfH1 (diverse religions, heroes, increased upgrade options, increased promotion options) and doesn't include the hundreds of minor inclusions that really make the game.