Glad to see you found your main problem...
Little explanation as to why it was giving you all that grief: Fragmented files are scattered all over the hard drive. The drive heads may have to move a lot in order to read the fragmented file. Since the textures were fragmented, any time SFC needed a texture loaded into memory on the fly, it has to read it off the drive, and the drive was scampering all over the place trying to read the various file parts, and SFC practically froze while it waited for your hard drive to cough up all the information.
The Above8bit.txt files aren't much of anything, they're generated by the model viewer / game to list which texture maps are "above 8 bit" graphics quality.
aafonts I'm not too sure of, but I think it's used for most of the text in the UI...
Now, onto the most recent batch:
Refresh rate should be the highest you can get while still getting the framerate and resolution you want.
Now, on the .ini entries, most from memory:
Wireframe, I believe, forces the game to render the ships as wireframes (no textures)
windowed is the entry to allow SFC to run in a standard window, this feature is broken in OP. Leave it at 0
zbuffer says to use the video system's z-buffer.
lowres is the indication of what resolution you want. All I know is that 3=1024x768 resolution.
backdrop turns on and off the backdrop (space backgrounds?)
shipstacking - no clue.
ambientlighting is how bright things look in SFC.
The 2 luminance entries turn on the glowies
spacedust turns on and off spacedust. Drawing dust in space (along with stars etc.) causes a significant framerate drop...
The UI stuff, I've never played with...