Nice find! I too had converted this .lit dictionary (several years ago) to my own reader's .imp format, and had also used extensive search & replace.
However, it is not a dictionary for Mobipocket use. It's just an ebook.
Thanks for the detailed instructions! I must try this now!
EDIT: BTW, I also converted the Foreign Translation-type dictionaries available at the microsoft link you provided. Did you try converting those to Mobipocket dictionary form?