Kotor 1 has a much better story.
1) You start in a crucial battle.
2) Your past is unknown until the revelation you are Revan.
3) The characters had interesting stories and backgrounds.
4) The end was very epic.
However kotor 1 had some drawbacks:
1) The level cap.
2) The fact that the end is not very different due to your path choice. (You can be a murderous hero...)
3) The story was somewhat predictable. (though better than kotor 2)
Generally Kotor 2 as gameplay is better.
1) Randomly created items (though I don't like it).
2) No level cap.
3) More Force Power choices.
4) No level spend (which is also force power spend) on soldier, scoundrel.... You start as a Jedi which means your character has more force powers.
5) Prestige classes. (though you should be better informed about this option)
6) Attributes and feats have larger effects. (means damage is not equal to strength modifiers but much greater)
7) Better lightsaber upgrades and generally upgrade system.
Different movie ending for light and dark side.
The facts I did not like about Kotor 2:
1) The start of the game sucks...
2) The whole story around Kotor 1 is ruined. You don't know what happened to Revan, the others' histories are also lost. If you haven't played kotor 1 before, you make very wrong predictions about it. Revan is considered evil and is completely lost and the Kotor 1 events are generally referred to as the Jedi Civil War... LOL!
3) The character is very strong at the end of the game (assuming you don't auto-level and know a thing or two around RPG games). So the enemies should have been more difficult. Even if you change the option to difficult you will not notice a vast difference.
4) The whole story is rather unimportant to the galaxy than in kotor 1. That makes the game much less epic.
One very important fact for which I liked kotor 2 was that kreia introduces a new type of character far differnet to what we knew until now from Star Wars. Although uncomplete, the story has some very interesting parts and aspects, far more than those of kotor 1. However, the rash ending ruines it completely and is very difficult for the gamer to appreciate the efforts of creating a storyline based on a completely different storyline.
Conclusion:
Kotor 1 was a great game and a very exciting game experience at its time.
Kotor 2 tried to make something even better, not only as gameplay where it is certainly better, but also in story and characters. Though the basis was good the ending was rash and in my opinion they alone destroyed what tried to create because of their attempt to complete it earlier.
Good effort but uncomplete.
Sorry guys but kotor 1 is still better...
If you try kotor 3, use more time... and imagination... <_<