Hello Anand,
There is no doubt that the second solution is the best one. It will have a faster recovery after spanning tree events.
When cascading router & switches, there are two issues to keep in mind.
1: the 3-4-5 rule for ethernet networks. You will not have too much trouble with this when using switches, while they buffer the signal and create separate collision domains.
2: spanning tree stability. A network that consists of many segments will suffer severe disturbance when a spanning tree event occurs. The path to the root should therefore not exceed 7 hops and this is the limit that you encounter when you attempt to enlarge the span of your ethernet network. The following URL describes the issues that may occur under these circumstances:
http://www.cisco.com/en/US/tech/tk389/tk621/technologies_tech_note09186a00800951ac.shtml
We are talking flat ethernet here; it's all very different when you separate your segments with routers and/or L3switches.
Regards,
Leo