Hi, Speakermom and Julie!
Great questions.
Speakermom, the difference between science fiction and fantasy, in a nutshell: science fiction is based in part on science. Literally. If you study Isaac Asimov's books (he's considered the father of science fiction) much of it is based on technology and futuristic events.
Fantasy, on the other hand, can involve no technology whatsoever and be based in any time period. "Lord of the Rings", for example, reminds me of the middle ages and is not futuristic.
There are other themes as well... science fiction often involves robots, futuristic modes of transportation, etc. (i.e., Star Wars)

Julie: congratulations on receiving a personal letter from the publisher. That almost never happens. The fact that she took the time to do that means your writing is very good. I would weigh each of her suggestions, and if you agree with them, revise it and definitely send it to her again, with a cover letter thanking her for the suggestions and stating that you made those revisions. It couldn't hurt!
As to why she didn't return the manuscript... did you send her a self addressed, stamped envelope?
I agree that the picture book market is very small. I don't know how it compares between Australia and the U.S.

Are there any readers out there who have some suggestions for Julie regarding the picture book market?