What is a dds file ? It's a file encoded in an algorithm owned by Nvidia, which only could be read, until recently, by graphics boards from the factories of the firm itself. Nevertheless, with brand-new graphics boards from ATI, OpenGL 1.3 (needed for last releases) is supported, hence permit to use the lastest functions.

Major advantage: one can use textures with very high resolutions (until 16k, according to the memory amount in the graphic board) without effect of jerk.

There is a Nvidia plugin that let to open these files under Photoshop, as well as edit them. Moreover, you will be able to create yourself these textures from png or tiff pictures (however, be careful with the required memory...), and thus to benefit from the speed offered by this format. Because if this format isn't lossless quality as png is, it use much less memory !