An embedded system is a special-purpose computer system designed to perform a dedicated function. Since the system is dedicated to specific tasks, design engineers can optimize it, reducing the size and cost of the product. Embedded systems are often mass-produced, benefiting from economies of scale.
Physically, embedded systems range from portable devices such as digital watches and MP3 players, to large stationary installations like traffic lights, factory controllers, or the systems controlling nuclear power plants. In terms of complexity embedded systems run from simple, with a single microcontroller chip, to very complex with multiple units, peripherals and networks mounted inside a large chassis or enclosure.
Mobile phones or handheld computers share some elements with embedded systems, such as the operating systems and microprocessors which power them, but are not truly embedded systems themselves because they tend to be more general purpose, allowing different applications to be loaded and peripherals to be connected.

Examples of embedded systems
In the earliest years of computers in the 1940s, computers were sometimes dedicated to a single task, but were too large to be considered "embedded". Over time however, the concept of programmable controllers developed from a mix of computer technology, solid state devices, and traditional electromechanical sequences.
The first recognizably modern embedded system was the Apollo Guidance Computer, developed by Charles Stark Draper at the MIT Instrumentation Laboratory. At the project's inception, the Apollo guidance computer was considered the riskiest item in the Apollo project. The use of the then new monolithic integrated circuits, to reduce the size and weight, increased this risk.
The first mass-produced embedded system was the Autonetics D-17 guidance computer for the Minuteman missile, released in 1961. It was built from transistor logic and had a hard disk for main memory. When the Minuteman II went into production in 1966, the D-17 was replaced with a new computer that was the first high-volume use of integrated circuits. This program alone reduced prices on quad nand gate ICs from $1000/each to $3/each, permitting their use in commercial products.
Since these early applications in the 1960s, embedded systems have come down in price. There has also been an enormous rise in processing power and functionality. For example the first microprocessor was the Intel 4004, which found its way into calculators and other small systems, but required external memory and support chips.
In 1978 National Engineering Manufacturers Association released the standard for a programmable microcontroller. The definition was an almost any computer-based controller. They included single board computers, numerical controllers, and sequential controllers in order to perform event-based instructions.
By the mid-1980s, many of the previously external system components had been integrated into the same chip as the processor, resulting in integrated circuits called microcontrollers, and widespread use of embedded systems became feasible.
As the cost of a microcontroller fell below $1, it became feasible to replace expensive knob-based analog components such as potentiometers and variable capacitors with digital electronics controlled by a small microcontroller with up/down buttons or knobs. By the end of the 80s, embedded systems were the norm rather than the exception for almost all electronics devices, a trend which has continued since.

History
1) Embedded systems are designed to do some specific task, rather than be a general-purpose computer for multiple tasks. Some also have real-time performance constraints that must be met, for reason such as safety and usability; others may have low or no performance requirements, allowing the system hardware to be simplified to reduce costs.
2) Embedded systems are not always separate devices. Most often they are physically built-in to the devices they control.
3) The software written for embedded systems is often called firmware, and is stored in read-only memory or Flash memory chips rather than a disk drive. It often runs with limited computer hardware resources: small or no keyboard, screen, and little memory.

Characteristics
Embedded systems range from no user interface at all - dedicated only to one task - to full user interfaces similar to desktop operating systems in devices such as PDAs.

User interfaces
Simple embedded devices use buttons, LEDs, and small character- or digit-only displays, often with a simple menu system.

Simple systems
A full graphical screen, with touch sensing or screen-edge buttons provides flexibility while minimising space used: the meaning of the buttons can change with the screen, and selection involves the natural behavior of pointing at what's desired.
Handheld systems often have a screen with a "joystick button" for a pointing device.
The rise of the World Wide Web has given embedded designers another quite different option: providing a web page interface over a network connection. This avoids the cost of a sophisticated display, yet provides complex input and display capabilities when needed, on another computer. This is successful for remote, permanently installed equipment. In particular, routers take advantage of this ability.

In more complex systems
Embedded processors can be broken into two distinct categories: microprocessors (μP) and microcontrollers (μC). Microcontrollers have built-in peripherals on the chip, reducing size of the system.
There are many different CPU architectures used in embedded designs such as ARM, MIPS, Coldfire/68k, PowerPC, x86, PIC, 8051, Atmel AVR, Renesas H8, SH, V850, FR-V, M32R, Z80, Z8, etc. This in contrast to the desktop computer market, which is currently limited to just a few competing architectures.
PC/104 and PC/104+ are a typical base for small, low-volume embedded and ruggedized system design. These often use DOS, Linux, NetBSD, or an embedded real-time operating system such as MicroC/OS-II, QNX or VxWorks.
A common configuration for very-high-volume embedded systems is the system on a chip (SoC), an application-specific integrated circuit (ASIC), for which the CPU core was purchased and added as part of the chip design. A related scheme is to use a field-programmable gate array (FPGA), and program it with all the logic, including the CPU.

CPU platform
Embedded Systems talk with the outside world via peripherals, such as:

Serial Communication Interfaces (SCI): RS-232, RS-422, RS-485 etc
Synchronous Serial Communication Interface: I2C, JTAG, SPI, SSC and ESSI
Universal Serial Bus (USB)
Networks: Controller Area Network, LonWorks, etc
Timers: PLL(s), Capture/Compare and Time Processing Units
Discrete IO: aka General Purpose Input/Output (GPIO) Peripherals
As for other software, embedded system designers use compilers, assemblers, and debuggers to develop embedded system software. However, they may also use some more specific tools:
Software tools can come from several sources:
As the complexity of embedded systems grows, higher level tools and operating systems are migrating into machinery where it makes sense. For example, cellphones, personal digital assistants and other consumer computers often need significant software that is purchased or provided by a person other than the manufacturer of the electronics. In these systems, an open programming environment such as Linux, NetBSD, OSGi or Embedded Java is required so that the third-party software provider can sell to a large market.

In circuit debuggers or emulators (see next section).
Utilities to add a checksum or CRC to a program, so the embedded system can check if the program is valid.
For systems using digital signal processing, developers may use a math workbench such as MATLAB, Simulink, MathCad, or Mathematica to simulate the mathematics.
Custom compilers and linkers may be used to improve optimisation for the particular hardware.
An embedded system may have its own special language or design tool, or add enhancements to an existing language.
Software companies that specialize in the embedded market
Ported from the GNU software development tools
Sometimes, development tools for a personal computer can be used if the embedded processor is a close relative to a common PC processor Debugging
Embedded systems often reside in machines that are expected to run continuously for years without errors, and in some cases recover by themselves if an error occurs. Therefore the software is usually developed and tested more carefully than that for personal computers, and unreliable mechanical moving parts such as disk drives, switches or buttons are avoided.
Recovery from errors may be achieved with techniques such as a watchdog timer that resets the computer unless the software periodically notifies the watchdog.
Specific reliability issues may include:

The system cannot safely be shut down for repair, or it is too inaccessible to repair. Solutions may involve subsystems with redundant spares that can be switched over to, or software "limp modes" that provide partial function. Examples include space systems, undersea cables, navigational beacons, bore-hole systems, and automobiles.
The system must be kept running for safety reasons. "Limp modes" are less tolerable. Often backups are selected by an operator. Examples include aircraft navigation, reactor control systems, safety-critical chemical factory controls, train signals, engines on single-engine aircraft.
The system will lose large amounts of money when shut down: Telephone switches, factory controls, bridge and elevator controls, funds transfer and market making, automated sales and service. Reliability
For high volume systems such as portable music players or mobile phones, minimizing cost is usually the primary design consideration. Engineers typically select hardware that is just "good enough" to implement the necessary functions.
For low-volume or prototype embedded systems, general purpose computers may be adapted by limiting the programs or by replacing the operating system with a real-time operating system.

High vs Low Volume
There are several different types of software architecture in common use.

Embedded software architectures
In this design, the software simply has a loop. The loop calls subroutines, each of which manages a part of the hardware or software.

Simple control loop
Some embedded systems are predominantly interrupt controlled. This means that tasks performed by the system are triggered by different kinds of events. An interrupt could be generated for example by a timer in a predefined frequency, or by a serial port controller receiving a byte.
These kinds of systems are used if event handlers need low latency and the event handlers are short and simple.
Usually these kinds of systems run a simple task in a main loop also, but this task is not very sensitive to unexpected delays. The tasks performed in the interrupt handlers should be kept short to keep the interrupt latency to a minimum.
Sometimes longer tasks are added to a queue structure in the interrupt handler to be processed in the main loop later. This method brings the system close to a multitasking kernel with discrete processes.

Interrupt controlled system
A nonpreemptive multitasking system is very similar to the simple control loop scheme, except that the loop is hidden in an API. The programmer defines a series of tasks, and each task gets its own environment to "run" in. Then, when a task is idle, it calls an idle routine (usually called "pause", "wait", "yield", "nop" (Stands for no operation), etc.).
The advantages and disadvantages are very similar to the control loop, except that adding new software is easier, by simply writing a new task, or adding to the queue-interpreter.

Cooperative multitasking
In this type of system, a low-level piece of code switches between tasks based on a timer. This is the level at which the system is generally considered to have an "operating system", and introduces all the complexities of managing multiple tasks running seemingly at the same time.
Any piece of task code can damage the data of another task; they must be precisely separated. Access to shared data must be controlled by some synchronization strategy, such as message queues, semaphores or a non-blocking synchronization scheme.
Because of these complexities, it is common for organizations to buy a real-time operating system, allowing the application programmers to concentrate on device functionality rather than operating system services.

Preemptive multitasking
A microkernel is a logical step up from a real-time OS. The usual arrangement is that the operating system kernel allocates memory and switches the CPU to different threads of execution. User mode processes implement major functions such as file systems, network interfaces, etc.
In general, microkernels succeed when the task switching and intertask communication is fast, and fail when they are slow.
Exokernels communicate efficiently by normal subroutine calls. The hardware, and all the software in the system are available to, and extensible by application programmers.

Microkernels and exokernels
In this case, a relatively large kernel with sophisticated capabilities is adapted to suit an embedded environment. This gives programmers an environment similar to a desktop operating system like Linux or Microsoft Windows, and is therefore very productive for development; on the downside, it requires considerably more hardware resources, is often more expensive, and because of the complexity of these kernels can be less predictable and reliable.
Common examples of embedded monolithic kernels are Embedded Linux and Windows CE.
Despite the increased cost in hardware, this type of embedded system is increasing in popularity, especially on the more powerful embedded devices such as Wireless Routers and GPS Navigation Systems. Here are some of the reasons:

Ports to common embedded chip sets are available.
They permit re-use of publicly available code for Device Drivers, Web Servers, Firewalls, and other code.
Development systems can start out with broad feature-sets, and then the distribution can be configured to exclude unneeded functionality, and save the expense of the memory that it would consume.
Many engineers believe that running application code in user mode is more reliable, easier to debug and that therefore the development process is easier and the code more portable.
Many embedded systems lack the tight real time requirements of a control system. A system such as Embedded Linux has fast enough response for many applications.
Features requiring faster response than can be guaranteed can often be placed in hardware.
Many RTOS systems have a per-unit cost. When used on a product that is or will become a commodity, that cost is significant. Exotic custom operating systems

Communications server
Embedded operating systems
System on module
System on chip
Firmware
Information appliance
Microprocessor
Programming languages
Real-time operating system
Software engineering
Ubiquitous computing