Yeah, it's an interesting one. I think UDK has similar terms which would, if interpreted in a literal sense, prevent most 18+ games - pretty much all combat games based on modern theatres of war could be argued on the ground of xenophobia (intolerance of Arab stereotypes) for example.
I think it's supposed to be interpreted in a similar way to current anti-inflammatory and anti-incitement laws, i.e. you can't/shouldn't be making/distributing games which make deliberate calls to some form of action, violence or other call to cause harm (think 'neo-nationalists', islamophobes, terrorist groups and so forth). And yes, you certainly couldn't make an 18+/M rated 'Adult' game with it (or anything that would allow that type of interaction between users).
Generally speaking these types of terms are aimed at protecting the company from being sued because "
such-and-such used their engine so they support that kind of philosophy/action" etc. So yes, on one hand is it a de facto restriction on use, but on the other it protects the company from liabilities.
Back on topic. Being an ISO game, and the level of detail (based on camera distance), going above 256x256 seems redundant as the benefits attributed to larger sizes may not be that noticeable. Might be worth testing for the sake of testing though.
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see here for continuation of ToS discussion)
