Sounds like your using improper AA and AF settings. Not sure where to find it, but there used to be a thread talking about AA and AF settings LFS does not support. They will run the game, but your frames will be cut by an 1/8.
I'm no expert, but I guess that you can use xvid with double pass encoding. First you should generate an uncompressed master video using your favorite video edition software (premiere, vegas, etc) and then use something like virtualdub for compressing it into a normal sized video using a two-pass encoding codec. I think all of this is covered in the "making LFS movies #2" thread in the "Editing" section: http://www.lfsforum.net/showthread.php?t=53389