That sounds strange, seems like it's taking a long time, as if there are still skins waiting to be converted - but really that should only happen once - and it shouldn't take very long because it would only be if you added a new skin after starting LFS.
So I'm wondering, Could it be you have a corrupted skin in your skins folder, that LFS keeps trying (and failing) to convert? Could you try this : Go in LFS, click to select a skin (I guess it should pause a long time even in single player). After the long pause, have a look in CFG.txt and see what skin it was trying to convert (it's probably one of the last lines in the file). Now go into your skins folder and just try to open that skin (to see if it's a corrupted file).
Hmm, that's bad. Crash address is in D3D8 so I can't really do anything with it. Does it work now that it's not the first time? And if it does work, does it work ok regardless of the windowed while connecting option?
And does it crash with a clean install of full version W + patch W26?