Definition: An Emulator is a software application that can accurately imitate another computer, mobile phone, device or even arcade machine and run software from that computer. Virtually every home computer system that has been ever created has been emulated. Modern CPUs can execute code thousands of times faster than computers from the early 80s and there are emulators for systems as recent as the Sony PlaySation 2 and PSP.
An emulator is similar (in theory) to an interpreter and works in a similar way though an emulator does far more than just interpret instructions.
Glossary:
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Emulators come in all shapes and sizes but two related open source projects MAME and MESS share more or less the same code base. MAME is for arcade machines while MESS emulates home computer and handheld systems.

