D2 is better than D1 in pretty much every single regard. The only area where the two can exchange blows is music. D1 has better map music, D2 has much better combat music (and also more than a single track that gets old pretty fast in D1).

The fact the you can't even level units past their last evolution in D1 makes it pretty boring to play too on longer maps, where battles just become a chore you gain nothing from. The campaigns are also like 4 missions per faction. It can serve as a good intro, but after you've played it once, there is pretty much no reason to play D1 over D2.

And as for balance in Heroes 3, it has never been and never will be balanced. The amount of restrictions, changes and special rules that had to be put in place to make it even remotely competitive for multiplayer games is evidence enough. Necropolis is busted, Conflux has been the biggest balancing joke in gaming history since its release, caused by the hurried dev cycle because the original faction they've been working on had to be scrapped and they just glued together Conflux at the last minute. Spell balance is a complete mess, Skills are either mandatory or completely useless, most hero specializations are useless and so on...