To answer your question, the different generations were differet styles, basically. The early generations were thicker, and had much smaller drives. The round dials have changed, from being a spinning piece of plastic to the new touch-sensative circles. Newer the better, but I'm sure some of the older ones are just fine.
I was using a friend's Gen4 at school one day, and it did seem to crash on me once. Not a huge deal, but, hey.
You might also look into the Creative Nomad Zen (or such) as they are much much cheaper, though not quite as easy to operate as the ipods, but still very nice.
Tell us more about this Sony/Microsoft joint player!
You're the guy from that hamburger train, right?