I've had my best results converting LIT files to ePub using a multistep process. I use Amber Lit Converter to go from LIT to RTF. Edit/format the file to my liking in MS Word, then save as filtered HTM. I then use Calibre to convert the HTM to ePub.
It sounds like a lot of bother, but if, as dwanthny said, you have a poorly formatted LIT file, this works best for me.
I do all my formatting, page breaks, paragraph spacing, etc. in Word, because I haven't figured out the fine points of tweaking HTML code with Calibre.
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