The most important distinctions between Bipolar I and II are:

1. A person with BP II experiences hypomanic episodes but not manic episodes. The difference between mania and hypomania is a matter of severity - hypomania generally does not impair a person's daily functioning or cause the need for hospitalization.
2. Experience of psychotic symptoms such as hallucinations or paranoia indicates Bipolar I Disorder; the presence of such symptoms rules out Bipolar II.

I copied the above from : http://bipolar.about.com/cs/faqs/f/faq_bp12dif.htm