As a fighting game, NS2 is better. Generations has a lot of "off hits" where the targeting system just outright fails. There are a lot of damage changes for the worse, making some of the high damage characters and high damage attacks a lot less than they should be and certain characters deservering nerfs(ino and deidara) still get free roam.
Story had no events and thats what made ns2 one of the better naruto games. Also, increased damage is total bullshit for a fighting game, especially one as non-skill based as naruto.(i.e. defense isn't really an option).