The first benefit is that the system will start faster. The Explorer shell takes a significant amount of time to load all of the support libraries and files, whereas a specific application will most likely have fewer libraries to load. The second benefit is that access to a device's administrative functions can be limited, depending entirely on how the custom shell application is written.

Limiting a user's access to administrative functions such as Control Panel can be a benefit, but there is a small drawback: The administrator is also limited unless the administrator can start in a different shell.

The ideal solution would be to set up Windows XP Embedded so that the user account can start in the application shell and the administrator account can start in an administrative shell. Security features built in to Windows XP Embedded would then prevent users from accessing administrative functions. This article describes how this solution can be implemented.

Source: http://www.thatsmyview.net/faq/client-related/changing-the-windows-xpe-shell/