The Sith Lords is lacking a bit in polish, and I admit that the end of the game definitely feels a little bit rushed (though not nearly as bad as some people make it out to be - there's just one or two side-plots that don't get fully resolved). However, it has some of the best dialogue in any game I have ever played, as well as the best character in Kreia, who is one of the most awesomely manipulative, scheming, and yet likable people I have ever known. At any given moment you feel like she could be both an enemy, friend, observer, and has a thousand plots to take you and everyone else down, yet you rely on her and lover her for the advice she dispenses. Furthermore, The Sith Lords is quite possibly the only part of the Expanded Universe (or maybe even the entire Star Wars canon) to actually take itself seriously. The Force becomes a metaphor and subject of philosophical debate, and questions about the natures of good and evil as well as redemption and the value of life and existence are subtly introduced into nearly every important dialogue. From the writer of Planescape: Torment I would expect no less, but really, it beats the crap out of the original game in every respect when it comes to storyline and writing, even if it lacks the major twist of the first game. Oh, and did I mention that The Sith Lords is also a much deeper game, with more side-quests, much more balanced difficulty and character customisation, a better weapon upgrading and creation system, more use for skills like Security and Persuade, etc.?
The only reason, the only reason everyone things that the first Knights of the Old Republic is better than the second is because a) it is a nostalgia trip and movie fan service, and b) because it is made by BioWare, and people have a tendency to worship BioWare on name alone (not that they don't deserve a lot of this praise).