Since the App Store launch, there have been a ton of need apps sent out directed toward reading digital content. While I have a Sony Reader, it's more or less for home or long road trips, the iPod Touch is for out and about day trips and train trips around Tokyo. I've been using handheld portable device since the original Palm Pilot Pro and I can tell you that the screen on the Touch beats the heck out of anything else out there. While Windows Mobile might have a larger range of supported formats, if you're looking for PDF support or RTF/DOC support, then stick with the Touch. In my opinion, it's the best for reading on, especially if it's a PDF that's not reflowable; i.e., you can just flip to landscape and pinch-adjust the screen until you're at a comfortable level of viewing.
While there isn't any way to view LIT files on an iPod Touch yet, I think that once M$ sees the amount it can make in microtransactions from it's competitor, you might see one in the future... or some crafty fellow/lady will make a port and you can get it there. While I love both my Sony Reader and my iPod Touch, I have to go against the earliest comment and say I'd get rid of the Reader before the Touch simply because of the massive range of things I can do with my Touch where as my Reader serves one simple purpose, reading books (and does that quite beautifully, so why would I have to choose?).
Whatever your decision, good luck and do your research. Cheers!
Edit: Ok, I guess you can view LIT files through Stanza. Here's a link to the list of file types supported by Stanza from the source. Check out the video presentation of it running on the iPod Touch/iPhone, looks like I might have to check it out too!