Embedded Linux refers to a complete system, or in the context of an embedded Linux vendor, to a distribution targeted at embedded devices.
Although the term “embedded” is often also used in kernel discussions, there is no special form of the Linux kernel targeted at embedded applications. Instead, the same Linux kernel source code is intended to be built for the widest range of devices, workstations, and servers imaginable, although obviously it is possible to configure a variety of optional features according to the intended use of the kernel.
In the context of embedded development, you will typically encounter embedded Linux systems—devices that use the Linux kernel and a variety of other software—and embedded Linux distributions—a prepackaged set of applications tailored for embedded systems and development tools to build a complete system. It is the latter that you are paying for when you go to an embedded Linux vendor. They provide development tools such as cross-compilers, debuggers, project management software, boot image builders, and so on. A growing number of vendors have chosen to integrate much of this functionality into customized plug-ins for their own versions of the community developed Eclipse graphical IDE framework.