Nope, it takes .jpg's in full quality, and then i put them in Photoshop and go "Save For Web" - however if i'll be pasting them in photoshop i'm probably better just directly pasting them into Photoshop.
I don't think it's the Quality of the JPEG that makes it look good, i've whored the LFS Forum for custom textures, and i've got every setting in the nVidia control panel maxxed out (8xAA because 16x doesn't like going over 1280*1024, 16xAF, High Quality etc) and i then put LFS in windowed mode and stretched it across both screens (ghetto, y0!) and took a screenshot and cropped off the bars (which you can still see in a few pics :X). Looking forward to this "free TFT" deal coming through so i can do the same with a triple monitor setup.
I really should make a guide on how to get LFS to look better using your GFX card drivers.