Welcome to MobileRead, Greg! I can't answer all of your questions but I'll do my best with what I do know.
I've never converted .lit so I don't know about that. I know there are lots of folks here that do, so it must be legible. Hopefully they can chime in and let you know if it's easy.
Mobi files work great. You can register your PID (the Kindle's unique hardware identifier) and use igorsk's Kindlefix scripts on them. Then you just copy them via USB to the Kindle. You can also just bust the DRM off of them but we do ask that you don't steal from the library. I do that because I'm just used to un-DRMing books for archive and am too lazy to automate two different processes but I delete the library books when the loan period is over.
Lightwedge. I only have the red night-vision model and it's a bit dim frankly. I use a clip on booklight (the MightyBright LED model). It hooks onto the case and casts a very nice light.
PDF is tricky. I've had some PDFs that were mostly text convert quite well. I've never had one without at least a few visual oddities. Now that the Adobe DRM is cracked, I've checked out my first PDF library book. I converted it with Calibre and the text is just fine but there are little glitches. The page numbers are in the text and little things are off here and there but it's quite reasonable. The Table of Contents works. It's the sort of stuff I could fix but since it's not a permanent book, I'll just tolerate it.
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