A prequel is a work that portrays events which are set in the same "universe" as a previously completed narrative, but at an earlier time. The word is a neologism, dating to the early 1970s; it is a portmanteau formed from pre-, meaning before, and sequel, a work which takes place after a previous one. "The term has recently slipped into common usage with its popularization by the advent of Star Wars Episode I: The Phantom Menace" wrote Chris Deever in Truth in Cinema, May 28, 2001 (http://www.truthinstuff.com/Cinema/prequel.html). The Star Wars prequel trilogy greatly popularized the term in American culture.
Like sequels, prequels may or may not concern the same plot as the work from which they are derived. Often, they explain the background which led to the events in the original, but sometimes the connections are not as explicit. Prequels often play on the fact that the audience knows what will happen next, using deliberate references to create dramatic irony.
Another example of a prequel in C. S. Lewis' The Chronicles of Narnia, is The Magician's Nephew, a prequel to The Lion, the Witch, and the Wardrobe which was written first.
The term prequel is often misused to describe any work set before a related work. Those who misuse the term do not understand that "sequel" is one of the words used to create "prequel." To use a modern example, The Phantom Menace (1999) is a prequel to Return of the Jedi (1983), but not to Attack of the Clones (2002).
Schrader's Dominion: Prequel to the Exorcist may be slightly more literate than Harlin's dopey schlockfest, but this deadly dull and pretentious film is ultimately just as bad.