The new version is much thinner, like iPod thin. The keyboard is more streamlined (and Apple-like) and the side buttons are smaller and pivot inwards instead of outwards, making them harder to press by mistake (a common complaint with the Kindle 1). The back is stainless steel and non-removable (another common complaint about the Kindle 1 was the flimsy battery cover), but this means the battery is not user-replaceable (Apple Apple Apple!). Storage has been increased from 128 Megs to 2 Gigabytes, however the SD card slot (located inside the battery door on the Kindle 1) has been eliminated. The screen is slightly bigger and has been upgraded from 4 shades of gray to 16; you can really see the difference when you place the two side by side with the same image. The scroll wheel and weird shiny silver scroll bar have been replaced with a joystick; instead of highlighting entire lines, you can select specific words. The built-in dictionary is now automatic, you just select the word you want defined using the joystick and it displays the definition at the bottom of the screen. The new Kindle offers stereo speakers and a text-to-speech function that actually sounds close to human; it still has a problem with pacing, however. The new Kindle is MUCH faster than the old version, which is especially noticeable when searching through a large library. The new Kindle gets an improved cover lock system that actually works, however the cover is no longer included with the Kindle. Charging is done through a standard micro-USB cable and a computer or a USB power adaptor (the Kindle 1 required a dedicated power plug).
If you don't have one yet, the Kindle 2 is much nicer than the previous version and blows away the competition. If you already have the Kindle 1, the differences are probably not worth it to upgrade. The only reason I did is because I will be giving my old one to my SO.
And now the pics.
The Kindle 1 (left) is in the cover it came with, the Kindle 2 is in the optional Amazon cover. Other covers are offered
Backs of the Kindles. Note how the Kindle 1's battery door is barely attached.
The Kindle 1 cover is on top. It held the Kindle in place using a plastic tab and a notch in the battery cover. Any sideways pressure on the Kindle would tend to dislodge the battery cover, letting the Kindle fall out. The new Kindle cover requires rotating the Kindle on the bottom metal pin, then snapping the spring-loaded metal hook into a slot on the side of the Kindle. It can only be removed by pressing the hook downwards and rotating the Kindle off the bottom pin.
The Kindle 1 & 2 compared to typical hardback and paperback novels. The Kindle 2 can hold an entire library in a space less than half the size of a paperback book. The notches on the side of the K2 are part of the cover clip system.