I am creating a Tower Defense game and I have started to create the missiles that will be fired from my towers.  What is the best way to handle these missile objects?  The two methods I have thought of:

1.  Initialize and create enough missiles that you can use an 'alive' bool to create and reuse these missiles.
2.  Create a missile each time a bullet is fired and destroy it when it hits its target. 

Which is the better approach or is there something else I should be considering?  Thanks!

If you plan to deploy to XBox then 1. is the recommended techique.

Okay, thanks, that is exactly what am planning to do so I'll take that approach, I appreciate the fast response :)

You should absolutely use number 1).
Here is a very good blog entry about resource pools which you should really read.
Advice from the swamp: A generic pool collection class