This is possibly the most even match up in MK2.
Kitana wants to be aggressive, Lao wants to stay far away from her sweep.
With Lao, keep distance and try to force Kitana to jump into a whirlwind spin by mixing up hat throws.
His HK works great as an anti-air also. Against Kitana, you only want to use the teleport when you can see you're not going to be fan raised.
If Kitana gets close, don't be afraid to apply some jab yourself. Lao's sweep sucks range-wise, but it's faster than Kitana's.
Lao owns every character in the air with his jump punch/dive kick combo. Try to catch Kitana with that combo, as she's jumping at you.
Jump at your own risk- Kitana's square wave punch will take Lao down every time (unless he times a jump back punch perfectly).
With Kitana, get in, apply jab, sweep. If your opponent jumps alot, square wave them to death. Anticipate Lao's teleport by buffering forward over and over. When he teleports just hit HP and you'll catch him in a fan raise, and land a 50% combo. Getting Lao backed into a corner is a good thing. 95% of the time, a Lao trapped in the corner is going to teleport, so be ready with the fan raise. Lao can really kill Kitana in the air, but SUJPs work pretty well against him. IAFs aren't terribly effective against Lao, but if he is running away and trying to zone you with hats, trade projectiles with him. Chances are he'll change strategies.
Overall a 5-5 match. There aren't many matches in MK2 that are true 5-5 matches, but this is one of them, and that's why it's also one of the best!