If you’ve read the wikipedia article on machinima and you are still confused, check out Clive Thompson’s article for the New York Times Magazine about the most popular machinima, "Red Vs. Blue," created from the successful Xbox game Halo.
If you don’t want to register for the New York Times online (trying to avoid the super-panopticon, are you?), you can also read the original article on Clive Thompson’s blog, Collision Detection.