A femtocell is a wireless access point that improves cellular reception inside a home or office building.
The device, which resembles a wireless router, essentially acts as a repeater. The device communicates with the mobile phone and converts voice calls into voice over IP (VoIP) packets. The packets are then transmitted over a broadband connection to the mobile operator's servers.
Femtocells are compatible with CDMA2000, WiMAX or UMTS mobile telephony devices, using the provider's own licensed spectrum to operate. Typically, consumer-oriented femtocells will support no more than four active users, while enterprise-grade femtocells can support up to 16 active users.
The name femtocell was derived from "cellular" and "femto," a metric prefix that stands for 10^-15th, or one-quadrillionth, six orders of magnitude smaller than nano. Femtocells were originally called access point base stations. The development of femtocells is credited, in part, to the work of a skunkworks team at Motorola in the UK, where they created the world's smallest full power UMTS base station.
This video from ThinkFemtocell explains how a femtocell works.