Lots of good answers here.
A psychotic episode can be either:
1.) A really noticeable worsening of the person's usual psychotic symptoms, for a person who has some symptoms of psychoses most of the time.
2.) Psychotic symptoms that happen in a person who never has any psychotic symptoms most of the time.
So, in general, say, for a person has schizophrenia, a psychotic episode is a worsening of the symptoms he or she usually has. Instead of talking quietly about the icky things he sees in hallucinations occasionally, and simply saying his hallucinations are distracting and annoying, his hallucinations might get a whole lot more intense and frequent, and he may feel he has to fight them physically.
On the other hand, if a person has severe depression, or bipolar disorder, he or she could have a psychotic episode even though he doesn't have any psychotic symptoms at all, most of the time.
It depends on what a person's 'base line' level of psychotic symptoms actually is - any worsening from that base line is a 'psychotic episode'. And usually the idea of 'psychotic episode' goes along with the person's behavior falling apart - they might fight, or yell, or feel they need to very quickly get somewhere else.
If I totally missed what your question really is, and you're asking about what 'psychotic' really means, it means that the person's feelings, thoughts and senses are being distorted, often by a mental illness. The word 'psychotic' usually appears along with discussions about schizophrenia, as psychosis is a symptom of schizophrenia.
But psychosis can occur in many different illnesses, not just in mental illness. Schizophrenia is, honestly, about the best thing that one can have, if you go looking through all the possible causes, of psychosis. Brain injury, seizures, brain tumors, lupus, dementia, toxic substances, all can cause psychosis. The after-effects of rheumatic fever can cause psychosis - even a high fever can cause psychosis. And there are many others - those are just the ones that I remember right now.
But many of those illnesses are rare, or rare at the age when mental illness often starts. So it's not usually as much of a mystery as to what's causing the psychosis, as it would seem on first glance.
Of course, that isn't the only thing in psychosis. It can also affect thinking. Many people start feeling like they are under a threat. They may get very suspicious - called paranoia. Their thinking may get more 'loose' - so that now they see different connections between ideas. Like the fellow who saw a nurse rushing past and thought of windmills. But psychosis doesn't always mean unpleasant feelings or emotions. Some of it is very pleasant, and may cause some people to not want any treatment.
Too, hallucinations can form from any sensory information - from vision, hearing, touch, pressure, etc. Many people have hallucinations that involve bodily feelings, anything from sexual to pressure, to a 'creepy crawly' feeling under one's skin, to a feeling that someone just pushed or shoved him or her. Sometimes hallucinations also bring specific emotions. That might be fear and anxiety, curiosity, or a 'high' or elated feeling.
My housemate used to sit on the other side of the room near the TV. I'd be reading a book on the other side of the room. Every once in a while he'd look my way with a glare, and say, 'Stop pushing on the top of my head'. I'd reassure him that I wasn't, but he was having a hallucination of pressure on top of his head.
A very common hallucination is of faces. That's because the brain has such a delicate and complicated method for evaluating facial expressions - it involves many parts of the brain that have to coordinate precisely to evaluate a facial expression. Psychosis can really unbalance that process.
What many people with out schizophrenia don't understand, is that these things aren't 'imagined'. The person's brain functions in exactly the same way as when he sees something real. As a neurologist once told me, 'the brain sees it, and also convinces itself that it's real'.
I asked why the brain convinces itself it's real.
He laughed and said, 'Our brains were never designed for deciding something we feel or see or hear, is NOT real. If we feel or see or hear it, it is regarded as real'.
'Let me ask you something', he said. 'Say you went outside, and you looked up, and the sky was grey. What would you think?'
'Point taken', I said, LOL.