This is a good question, given the way calculus is currently taught, which for me says more about the sad state of math education, rather than the material itself. All calculus textbooks and teachers claim that they are trying to teach what calculus is and how to use it. However, in the end most exams test mostly for the students' ability to turn a word problem into a formula and find the symbolic derivative for that formula. So it is not surprising that virtually all students and not a few teachers believe that calculus means symbolic differentiation and integration.
My view is almost exactly the opposite. I would like to see symbolic manipulation banished from, say, the first semester of calculus. Instead, I would like to see the first semester focused purely on what the derivative and definite integral (not the indefinite integral) are and what they are useful for. If you're not sure how this is possible without all the rules of differentiation and antidifferentiation, I suggest you take a look at the infamous "Harvard Calculus" textbook by Hughes-Hallett et al. This for me and despite all the furor it created is by far the best modern calculus textbook out there, because it actually tries to teach students calculus as a useful tool rather than a set of mysterious rules that miraculously solve a canned set of problems.
I also dislike introducing the definition of a derivative using standard mathematical terminology such as "limit" and notation such as $h\rightarrow 0$. Another achievement of the Harvard Calculus book was to write a math textbook in plain English. Of course, this led to severe criticism that it was too "warm and fuzzy", but I totally disagree.
Perhaps the most important insight that the Harvard Calculus team had was that the key reason students don't understand calculus is because they don't really know what a function is. Most students believe a function is a formula and nothing more. I now tell my students to forget everything they were ever told about functions and tell them just to remember that a function is a box, where if you feed it an input (in calculus it will be a single number), it will spit out an output (in calculus it will be a single number).
Finally, (I could write on this topic for a long time. If for some reason you want to read me, just google my name with "calculus") I dislike the word "derivative", which provides no hint of what a derivative is. My suggested replacement name is "sensitivity". The derivative measures the sensitivity of a function. In particular, it measures how sensitive the output is to small changes in the input. It is given by the ratio, where the denominator is the change in the input and the numerator is the induced change in the output. With this definition, it is not hard to show students why knowing the derivative can be very useful in many different contexts.
Defining the definite integral is even easier. With these definitions, explaining what the Fundamental Theorem of Calculus is and why you need it is also easy.
Only after I have made sure that students really understand what functions, derivatives, and definite integrals are would I broach the subject of symbolic computation. What everybody should try to remember is that symbolic computation is only one and not necessarily the most important tool in the discipline of calculus, which itself is also merely a useful mathematical tool.
ADDED: What I think most mathematicians overlook is how large a conceptual leap it is to start studying functions (which is really a process) as mathematical objects, rather than just numbers. Until you give this its due respect and take the time to guide your students carefully through this conceptual leap, your students will never really appreciate how powerful calculus really is.
ADDED: I see that the function $\theta\mapsto \sin\theta$ is being mentioned. I would like to point out a simple question that very few calculus students and even teachers can answer correctly: Is the derivative of the sine function, where the angle is measured in degrees, the same as the derivative of the sine function, where the angle is measured in radians. In my department we audition all candidates for teaching calculus and often ask this question. So many people, including some with Ph.D.'s from good schools, couldn't answer this properly that I even tried it on a few really famous mathematicians. Again, the difficulty we all have with this question is for me a sign of how badly we ourselves learn calculus. Note, however, that if you use the definitions of function and derivative I give above, the answer is rather easy.
The story is told in some detail in Sylvia Nasar's "A Beautiful Mind", a biography of John Nash, who was a fellow student of Milnor at one point. In that version, Milnor knew that Borsuk's conjecture was an open problem; he wrote up his apparent answer not believing it to be correct, and asked Fox to look it over since he (Milnor) hadn't been able to find the error himself. Fox told him to write up the result for publication; the final result was generalized considerably over the original version. It's pretty likely that Nasar interviewed Milnor (because of his biographical connection with Nash) while writing the book, so her version is probably as good as you'll find.
The "came to class late and thought it was a homework problem" story is about George Dantzig and is easy to find on the internet (e.g. Wikipedia or Snopes). It was about some problem in statistics. I think there may have actually been two open problems involved.
Sometimes the Dantzig story gets told with SIX open problems. That might be confabulated with Grothendieck's PhD thesis. Dieudonné and Schwartz had written a paper on functional analysis ending with six apparently difficult open problems. They turned these over to Grothendieck saying something like "see if you can make some progress on any of these, and that can be your thesis." Within a few months Grothendieck developed the theory of nuclear spaces, that turned all six problems into trivial calculations, and basically killed off the research direction originally proposed (by completely solving it). That story is from Allyn Jackson's biographical profile of Grothendieck in Notices of the AMS, I think.
Best Answer
This happened just last year, but it certainly deserves to be included in the annals of mathematical legends:
A graduate student (let's call him Saeed) is in the airport standing in a security line. He is coming back from a conference, where he presented some exciting results of his Ph.D. thesis in Algebraic Geometry. One of the people whom he met at his presentation (let's call him Vikram) is also in the line, and they start talking excitedly about the results, and in particular the clever solution to problem X via blowing up eight points on a plane.
They don't notice other travelers slowly backing away from them.
Less than a minute later, the TSA officers descend on the two mathematicians, and take them away. They are thoroughly and intimately searched, and separated for interrogation. For an hour, the interrogation gets nowhere: the mathematicians simply don't know what the interrogators are talking about. What bombs? What plot? What terrorism?
The student finally realizes the problem, pulls out a pre-print of his paper, and proceeds to explain to the interrogators exactly what "blowing up points on a plane" means in Algebraic Geometry.