DDS is a compressed texture format that is supported by FreeSpace SCP. Any modeler should use DDS for their textures as much as possible, as it is 1/2 the size of a PCX and 1/8 the size of a TGA image.
Background on DDS The DDS File format was created by Microsoft for it's DirectX graphics API, however, it has become a general format for Textures and is supported by OpenGL(the graphics API the FS2 SCP uses). The official discription of DDS is "The Microsoft DirectDraw Surface (DDS) file format is used to store textures and cubic environment maps, both with and without mipmap levels. This format can store uncompressed and compressed pixel formats, and is the preferred file format for storing DXTn compressed data."
Several tools exist for working with this format, besides any tools created by the FS2 SCP team. These tools are detailed here: nVidia website and should be usful.
Usage of DDS The primary note to any texturer using the DDS file format is that even if DDS enables you to have twice the texture size, doesn't mean you should use all the available memory.