I've owned both...
I had a '99 SR5, "tall coil" model, 3.4, Auto, with the E-locker for 3 years.
I currently own an '07 SR5 V6 and have had it for a year and a half (purchased in June of 2012.)
3rd gen pros:
* Factory suspension (if you get the tall coil model)
* Better off-road from the factory
* E locker
* Smaller footprint
* Fewer electronic doo-dads to screw up.
3rd gen cons:
* Noisy at highway speeds
* Lackluster power
* Poor MPG combined with undersized gas tank = unacceptably short range.
* 4 speed A340 auto sucks power, transmission dipstick is a SOB to get back in after removing it.
* Fuel gauge is notoriously bad (look on the 3rd gen forums)
* Drum rear brakes
4th gen pros:
* Significantly more powerful engine (even with the V6 and a V8 is available)
* Significantly larger gas tank + same MPG as 3rd gen or in some cases, better MPG = much longer range (> 400 miles in most cases.)
* 5 speed auto (all V8's, '05 -up V6's) is sealed, no dipstick, and is a much better transmission.
* Quieter, more comfortable interior
* Better brakes (4 wheel discs)
* Larger, more ability to carry/tow stuff.
* Multi-Mode 4wd on V6 4wd version (in 3rd gen this was only available from 99-2000 on Limited models but was on all 01-02 models. My '99 SR5 did not have multi mode.)
4th gen cons:
* More complex, more computerized crap to break (electronic 4wd control, electronic climate control, rear door ECU, VSC/TRAc, are all known failure points.)
* Lower suspension (though this can be fixed w/aftermarket parts)
* No E-locker except for '09 TE (but, again, the aftermarket offers a solution if you need one.)
I won't get into issues that are obvious (like the fact that 3rd gens are cheaper than 4th) or that are subjective (like looks) but for me the 4th gen was the clear winner.
I actually decided to go to a 4th gen after a long trip from Colorado to the West Coast in June of 2012 pulling our 1,000lb teardrop trailer. Even though the 3rd gen is supposed to be rated to pull (I think) 3,000lb, it struggled badly with our little teardrop and MPG dropped to around 11. Between the horrible gas mileage and the undersized tank, I ran out of gas in Oregon.
We've now taken a bunch of trips with the 4th gen and we both really like it. We love the room, the quiet ride, the power and the long range.
Things I'm not crazy about are the electronic 4wd controls (I would prefer a tried-and-true shifter knob on the floor) and the fancy climate control (which has been known to fail and it's an expensive fix. So far mine is fine - KNOCK WOOD!)
Hope that helps!