Theme
A file or collection of files (PHP, INFO, CSS, JPG, GIF, PNG), which together determine the look and feel of a site. A theme contains elements such as the header, icons, block layout, etc. Drupal modules define themeable functions which can be overridden by the theme file. There are additional themes available in the themes section of downloads.
theme engine
A set of scripts that interprets code and makes theming a site easier. These scripts take the dynamically generated content and output it to HTML. Drupal has three theme engines in addition to being able to write a theme that bypasses the theme engine. The default theme engine is phpTemplate. There are additional theme engines for downloads.