Noise-canceling phones utilize an active noise reduction system. They electronically produce a frequency which, with varying degrees of success, cancel out white noise (constant mid-level sounds like airplane engines and track noise). They require a power source (a single AAA battery in one earphone or two batteries in an external case).
Noise-isolating (in-ear) phones use a passive system, simply sealing the ear with a variety of foam canal tips. To the 30db or so reduction in all outside noise this alone provides, sound is enhanced by being sent directly into the ear. The ratio of music to outside noise in the ear is, therefore, extremely high They need no batteries, are lightweight and compact.
Source:
http://www.earphonesolutions.com/nocavsnois.html