The epilepsy filter was a last minute legal requirement: the publisher (Ubisoft) wanted the feature so they wouldn't be in danger of getting sued and they told the developer team to implement it.
The filter results in lower frame rates. It runs some math algorithms over the entire rendered picture on your monitor and tries to smooth out and average differences in light intensity above a certain threshold, because apparently it's the difference between how bright each picture is that can cause an epilepsy seizure and not the brightness alone.
For example, the filter would make the tracers less bright if the surroundings are darker (eg, flying at dusk), which wouldn't be needed if the surroundings were brighter (eg, flying at noon).
On the other hand, if you shoot down an enemy bomber and a part of his wing flies over your canopy, the filter will tone-down the sudden, split-second shadow that will be rendered, again to prevent sudden changes of brightness.
This takes a lot of calculations and that's why you get better performance with the filter disabled.
Now about the strange graphics. The anti-epilepsy filter was coded very hastily right before the release of the first version. There have been many patches that modified the graphics from that point in time forward (both the programming code and also the colours) but the filter stayed the same.
That's why having it enabled results in those strange artifacts: the graphics have changed but the filter is running calculations for the old graphics.
This whole discussion is probably going to be rendered irrelevant soon, because the entire graphics engine is being redone from scratch for the next patch.
In any case, i hope i've explained it well enough
