It is as if the heightmap was only applied to every other 'line' of terrain. I am not sure what is causing this.
You're right. There was an issue with the ordering of numbers in the chunk.
If you have Visual Studio, all you have to do is swap lines #74 and #76. If you use the compiled version, I'll upload a new zip after work.
My bad, I only tested the tool with square heightmaps (1001x1001, 501x501) and it works fine for those.
Updated the pages a bit to fix unknown items in the formats

Thank you, Norbyte. You're the author of lstools, right? I created the wiki article on LSB format and wrote my own parser without knowing about your tool. I'll probably release my source code in the public domain after a bit of cleanup. I hope you don't mind.