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You are right that a ROM is flashed on to the phone. This can include your Operating System (OS) and/or Radio.
A theme is just the background picture and color scheme that you see on your today screen and throughout the rest of the OS. It is just like themes on Windows XP or Vista. A theme, however, is not a background application.
Additionally, ROMs and themes are completely different thus 'pros and cons' cannot be evaluated. ROMs are what makes your PocketPC work and themes are what makes your PocketPC look customized.
Hope that helps.
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