I think it is where you can edit the style of the widget as its displayed. I am trying to add bullets to my Recent Comments lost. i tried to alter that file to no avail.
The ’embedded’ styles come from plugins/functions that use wp_head to insert styles. When you see raw css (rather then a link/import of an external file) someone is using ‘echo’ or ‘print’ to prepare raw text for insertion into the header.
A search for something like the following (in suspected scripts/plugins) should find it:
add_action('wp_head', 'echoed_css_code');
I know Ozh does it that way in his themetoolkit…