The Kilo-Degree Survey (KiDS) is a multi-band imaging survey designed for cosmological studies from weak lensing and photometric redshifts. It uses the ESO VLT Survey Telescope with its wide-field camera OmegaCAM. KiDS images are taken in four filters similar to the SDSS ugri bands. The best-seeing time is reserved for deep r-band observations that reach a median 5-sigma limiting AB magnitude of 24.9 with a median seeing that is better than 0.7arcsec. Initial KiDS observations have concentrated on the GAMA regions near the celestial equator, where extensive, highly complete redshift catalogues are available. A total of 109 survey tiles, one square degree each, form the basis of the first set of lensing analyses, which focus on measurements of halo properties of GAMA galaxies. 9 galaxies per square arcminute enter the lensing analysis, for an effective inverse shear variance of 69 per square arcminute. Accounting for the shape measurement weight, the median redshift of the sources is 0.53. KiDS data processing follows two parallel tracks, one optimized for galaxy shape measurement (for weak lensing), and one for accurate matched-aperture photometry in four bands (for photometric redshifts). This technical paper describes how the lensing and photometric redshift catalogues have been produced (including an extensive description of the Gaussian Aperture and Photometry pipeline), summarizes the data quality, and presents extensive tests for systematic errors that might affect the lensing analyses. We also provide first demonstrations of the suitability of the data for cosmological measurements, and explain how the shear catalogues were blinded to prevent confirmation bias in the scientific analyses. The KiDS shear and photometric redshift catalogues, presented in this paper, are released to the community through http://kids.strw.leidenuniv.nl .