May I suggest storing it as a JPEG? It's much less complicated then putting it in an LZS, and will probably use less space.If you want it lossless, though, do it as a PNG.
Yes, but that will make the executable larger, thus making updates take longer to download.
BTW, What is SCEAP.LZS?
The reason I ask this is because on the PSX disc there is a file called SCEAP.LZS (Sony Computer Entertainment America Presents) which is a 640 by 320 16bit raw image compressed in LSZ.