1. something new or different introduced.
2. introduction of new things or methods.
1. a transformation or modification; alteration.
2. a variation or deviation.
3. the substitution of one thing for another.
4. variety or novelty.
In the push to differentiate products, marketing folks tend to confuse the two together. The hype for Windows 95 (and now, for Vista) is a good example of this. Although the product had a lot of modifications and at least the surface was transformed, it's not really a new product. Going from win32 (Windows 98) to win32s (Windows 2000) was innovation because that was the point that they actively switched from bolting crap on to the old DOS kernel and used the new NT kernel as their base.
Apple showed innovation by dropping it's old and rapidly aging MacOS for NeXT (aka Rhapsody, aka MacOS X). The iPod was innovation, not so much because of the hardware, but rather because of iTunes.
This is a small distinction, but it's an important one that anyone who makes a product (including software developers) would do well to remember because while innovation is an opportunity to create and grow into a new market, change is usually little more than an opportunity for your customers to leave you. This is especially true for Software as a Service type offerings where your customer doesn't have the option of ignoring the new version and sticking with the old one (ie, World of Warcraft expansion, changes to iGoogle, Facebook pages, cellphone apps, etc).
The reason for that is because even though you might give advanced warning, and even though you might give people a perfectly reasonable amount of time to test out the new interface, you are still ultimately causing them migration headaches on a date of your choosing, not theirs, for your own benefit, not theirs. It's a disruption to their routine, and if you're not careful about it they can easily decide that the added cost of simply going somewhere else isn't that much higher than the cost of upgrading to your shiny new 2.0.