A great car manufacturing analogy from Beyond Borders: web globalization strategies has really helped me get the difference between Localisation and Internationalisation clear in my head:

When a car is designed and built, it is designed to be as appropriate for international markets as possible, so items like the steering wheel can be positioned at the right or left hand side of the car. So, Internationalisation is the behind the scenes work to make the item configurable and customisable as appropriate for a specific location.

When you buy a car, you generally buy a car that has been localised for your country - so here in the UK I would buy a right hand drive car, whilst my cousins in the US would buy a left hand drive car.