It doesn't use ffmpeg, sorry...
It uses transcode as framework, and (standard) the mjpegtools package as encoder.
Optionaly you can choose bbmpeg as video encoder (wich was my first attempt to make kvcd under linux), but that's veryyyyyyyyy sloooooooowwwwww.
transcode
http://zebra.fh-weingarten.de/~transcode is a framework that uses other encoders in a internal pipe. There are plugins for almost any linux encoder including ffmpeg. I've been trying to use that port, but it doesn't seem to use the standard libavcodec interface so I skipped out.