You need to get two free applications.
1. The infamous Convert Lit. (Do a Google search for it). This will explode the .lit into a number of HTML files. There are some threads on this site with some tips on how to use this program.
2. Mobipocket Publisher, from
www.mobipocket.com Use this program to compile the files into either an unprotected .lit or MobiPocket book.
In general it is not considered naughty to change the format of an eBook that you own, assuming it's for your own use. Threads discussing this have not been deleted or changed, unless they include links to software that could be used for illegal purposes. The admins of the site have taken a very sensible approach to this issue, especially when you consider that a number of them are associated with Microsoft and ConvertLit is probably not MS's favorite application.
By the way, I found that, after downloading the latest MS Reader update, I can't convert .lit books that I downloaded before the update.