Hehe, you are so completely right. M$ Reader barely supports VGA devices (the font sizes are at least twice as large as they need to be), it barely supports memory cards and it is a bit unreasonable in how it deals with the delay that they have reinitializing after a standby. In general there are a heck of a lot more usable readers out there. I used to use Mobipocket, but it had some quirks. Haalireader is perfect for me, incredibly lightweight and no extra baggage.
You can convert books from .lit and that is exactly what I do, I use Haalireader (
http://haali.cs.msu.ru/pocketpc/) which is a nice lightweight reader that just does text, and then use ABC Amber LIT Converter (
http://www.processtext.com/abclit.html) to convert all my .lit files to .fb2 for Haali. Amber can also convert to other formats but I tend not to use them. As far as I know it will only work for unencrypted books or ones you have a licence for, but I'm not too sure on that last point...