I've done a lot of research on this, even bought some Gen 3 Aluminum knuckles to make some mockups and try fitting parts.
Weight savings over a similar Iron knuckle is 3 to 5 pounds, can't recall the exact figure anymore, but regardless of the magnitude, its all unsprung weight loss, so its a good thing.
Beyond the materials, the major difference between the two is the way the ball joint connects to the lower control arm (LCA). Gen 1/2 have the ball joint in the LCA, the ball joint stud is non-tapered and is clamped at the bottom of the knuckle. Gen 3 have the ball joint integral with the knuckle, and use a tapered stud which mates with the Gen 3 LCA. Advantage: Gen 3, the ball joint is replaceable. Otherwise, all the other geometries are identical to the Gen 1/2 knuckle.
You'll need an adapter to use the Gen 3 ball joint stud with the Gen 1/2 LCA. The ball joint can be removed from the Gen 1/2 LCA by grinding off the swaged portion of the arm under the ball joint. The ball joint then just falls out and leaves a nice round, machined pocket. Then you get a steel adapter made which welds into the socket left by the vacated ball joint. The adapter has a tapered hole to match the tapered stud on the Gen 3 ball joint. The stud nuts on from the bottom of the modified Gen 1/2 LCA.
I made some adapters, but I never installed the knuckles due to the issues with putting early Baer/PBR brakes on these knuckles. The high-offset Corvette rotors I use allow me a good deal more flexibility with wheel choice then the low-offset Cobra rotors, which push the caliper outboard, closer to the wheel spokes.
Mustang Cobra 13" brakes are an easy upgrade on the Gen 3 knuckles, assuming your wheels have sufficient spoke clearance to the calipers. 11.6" brakes are also easy to install, as the caliper mount hard points are identical to the '94 and up Taurus Iron knuckle.
If my memory was really good, I could even tell you which taper reamer to go buy to match the Gen 3 stud taper, but its been awhile since I played with this stuff and put it away.
Some folks have looked into using the Gen 3 LCA with the old subframe. This would really be the ideal swap, as you get the better Gen 3 LCA and you don't have to make any adapters to use the Gen 3 knuckle. The Gen 3 LCA has improved anti-dive characteristics, which is why the Gen 3 cars will exhibit less brake dive despite having lower front spring rates then the Gen 1/2 cars.
Good luck.
<small>[ December 31, 2003, 11:12 AM: Message edited by: Gary M. ]</small>