I have got an issue with book designer and working with lit format.
Now it was working perfectly till a couple of days back and i was able to open the lit formatted books, format them for the reader and transfer.

For last 2 days(and i am pretty sure nothing has been installed on my laptop during that time) bookdesigner is not able to convert the books. In the middle of processing, a windows dialog pops up (see attachment) asking me to save the file(i am guessing the temporary file that bd makes in processing).

Its not even working with the lit's i had converted earlier so its definitely something new. It works fine with txt and html formats even now.

The only thing that could have changed is windows update might have downloaded some new fixes. any ideas on this?

I don't know what's gone wrong, but BD uses the "clit" tool internally to convert LIT to (I think) HTML, and then loads the HTML. You could always do the conversion yourself, and then open the HTML with BD.