Which year GenII Prius should I buy?

Not much difference. Make your choice on mileage , condition, options, Carfax report, etc.

 

^What he said.
I have an 05 and an 08. Both are great. We like the 08 better of course, as it's newer and has the smartkey and iPod hookup.
Given equal options though, I don't think you'll find much difference between an 07 or an 08.

 

07 to 09 Prius are almost identical other than options. I think the 06 was -slightly- different (different MFD screen). The 04 had a few "new car problems". They should have all been addressed by now though. The 05 had them fixed but was essentially the same car.
There are slight material differences in the cabin, but other than that and as noted above, all Prius are pretty much the same, again, except for options.

Options include:
Smart key system (SKS) - don't need to get the fob out to unlock the car and to run it. You just keep it in your pocket or purse.
Vehicle stability system (VSC) - became standard around 05 or 06. Car uses individual brakes to keep the car from "swapping ends" when the driver is inattentive re speed in corners or surprised by slippery road conditions.
Touring model - slightly stiffer suspension, 16" wheels, longer rear spoiler.
Cruise control.
Leather interior (US not Canada).
Bluetooth cell connection.
"Fancy" audio system.
GPS.
HID or halogen headlamps.
Fog lamps.
I've probably missed some, but those are the main ones.