I use the current version they offer from the MS Reader area of microsoft.com which is 2.1.1 and it works fine.
http://www.microsoft.com/reader/downloads/pc.mspx
Sorry, I know nothing about the version you posted (version 2.6.1)
Yes you do need it. You need an activated copy of MS Reader and Internet Explorer to download DRM'd LIT files. Then you need ConvertLit to break the DRM on those files before you can covert them to LRF.