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Could anyone explain the difference between Impersonated Windows Identity and Impersonated Custom identity in SharePoint?

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When you are configuring a BCS connection via SharePoint Designer you get 3 options, one of which is "Connect with impersonated custom identity." This option allows you to create a SQL Server or other account type (i.e. not a Windows AD account) and store those credentials in the Secure Store Service Application. The Secure Store keeps these credentials in a encrypted format but uses them whenever the ECT is accessed. These credentials could be almost anything that is username/password based like an Oracle account, a ASP.NET forms, etc.

See:
BCS Authentication Overview

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