What OS are you running? I think I have the same problem as you do sometimes. Only when I've been away from the computer for a long time and Vista locks itself and shuts down the monitor. When I then return and start LFS I have this weird "chequerboard" effect as you call it. Logging off and logging back in solves the problem. I don't have this problem in XP.
I too have this problem, but it doesn't only affect LFS, I've seen the same affect in Bioshock as well, it appears to be an issue with the nvidia drivers which has only started occurring recently,. I think the problem for me began about 2 or 3 video driver updates ago.
I'm running a Vista 32 bit, 7900GT and logging off and back on clears the problem.
Uh oh. Try if a driver update/change of some sort fixes it, but this suspiciously looks like what I got when my first 6600GT died of overheating. I mean not exactly, but having errors in a 16x16 pixel checkerboard probably means a memory chip is broken or maybe one of the texture pipelines is screwed up?
Whatever it is, if a new driver doesn't fix it, it's time to RMA the card.
thanks for everyones feedback, RMA happening tomorrow. Having recurring dreams of having my name next to fastest lap! see ya soon dudes, remember rubbing is racing!