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Compressed textures refers to the way the textures are loaded into your graphics card. With compressed textures enabled, you should get a small performance boost--the game will play just a little bit smoother with this check enabled. It will also look just a tiny bit fuzzier in a few places, for instance in the moon and the sky (you can see this in the main startup page a little easier than in other places).
It's a real subtle difference, though. If you can't tell the difference, it probably doesn't matter whether you leave it checked or unchecked.
David
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