The annual gift tax exclusion is the amount that can be given away by a taxpayer in any one year to any number of people free from any federal gift tax consequences at all. In other words, a lump sum gift or even a series of smaller gifts made to the same person during the course of a year that don't exceed the annual gift tax exclusion aren't really considered gifts at all - they're simply considered "freebies" when it comes to federal gift taxes. For 2011, the annual gift tax exclusion is $13,000.
In contrast, the lifetime gift tax exemption is the amount that can be given away by a taxpayer over his or her entire lifetime to any number of people that will be free from gift taxes but will reduce the amount that can be given away by the taxpayer tax free after death. In other words, the lifetime gift tax exemption is tied directly to the federal estate tax exemption such that if you gift away any amount of your lifetime gift tax exemption, then this amount will be subtracted from your estate tax exemption after you die. For 2011, the lifetime gift tax exemption is $5,000,000, which is the same as the federal estate tax exemption.