Paa files generally contain alpha channels, use them where you want some transparency options. Pac files generally don't have any transparency features on them.
game wise, from what I've experienced, paa files are alot tricker to use, especially in o2, as the order in which they are applied affects the order in which they are displayed (eg one face textured with paa may hide another one)
Some people also say that paa files have less color distortion than pac.
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