When on, use temp files for shell commands. When off use a pipe. When using a pipe is not possible temp files are used anyway. Currently a pipe is only supported on Unix and MS-Windows 2K and later. You can check it with:

:if has("filterpipe")

The advantage of using a pipe is that nobody can read the temp file and the 'shell' command does not need to support redirection. The advantage of using a temp file is that the file type and encoding can be detected. The FilterReadPre, FilterReadPost and FilterWritePre, FilterWritePost autocommands event are not triggered when 'shelltemp' is off. The system() function does not respect this option and always uses temp files. NOTE: This option is set to the Vim default value when 'compatible' is reset.

(Vi default off, Vim default on)