> And the microcontroller could be a PIC?

Yes and No.

Yes, its better that the microcontroller be another PIC.  This is to make
the I/O lines more or less the same in characteristics.  I'm not familiar
yet with PIC microcontrollers because I still haven't obtain any data book
or whatsoever.  But the thing is, if the I/O lines have, say, internal
pull-ups, etc., you don't have to do external circuit for it.  Its better
to keep things simple--as always.

No, it doesn't have to be another PIC (but of course, Parallax would
suggest otherwise!).  For example, a 68HC11 can do.

I think the code simulation can be inside the microcontroller (instead of
the PC).  The microcontroller code can then contain a Host Debugger
INterface to the Host.  This would mean a faster code emulation.

But then, we have to write a more difficult emulation core on the
microcontroller.  Better to keep it inside the PC.  Keep things simple.