I actually prefer the Gen1 suspension. Both need upgrading but that's a different subject.....the Gen1 has 9.1" of travel front and rear, the Gen2 has 7.9" front and 7.3" rear, not a good change for offroad use!
The Gen2 forks are slightly larger diameter (39mm vs. 41mm), the brake rotor is larger (280mm vs. 250mm) and the caliper is a twin piston unit, all of these things are positive though the differences aren't huge. IIRC the differences in the triple clamps will cause issues trying to use the Gen1 gauges or cowl.
On the rear, the caliper is twin piston vs. single and the chain adjusters are nicer.....again, nominal differences though it is an upgrade.
If it was my bike, I'd do the swingarm upgrade (assuming the parts can be had cheaply) but I'd use the Gen1 linkage and dogbones to keep the rear travel at 9.1".
On the front, I'd keep the Gen1 forks and do the same upgrades I've done to my Gen1's; Cogent Dynamics DDC kit c/w springs, EM fork brace, 320mm rotor, SV caliper, Eaglemike SV caliper adaptor, SS brake lines (all available from Eagle Mfg & Eng
except the used Suzuki SV caliper (ebay).
If you google "Alpheus 1999 KLR650" you'll find info on a Gen1 with the Gen2 suspension swap (as well as other things)