It has two display modes that can be toggled by tapping the screen with two fingers:
one will scale the compact mac's screen to the iPhone's 480x320, so you can see the whole thing, and the other will show real pixels and scroll when you touch the edges.
It is explained on mini vMac's page.
http://minivmac.sourceforge.net/doc/start.html
http://minivmac.sourceforge.net/image.html
Basically, you don't convert a .sit to .dsk, you extract whatever is in the .sit and copy it to a disk image.
I think the best thing would be to get StuffIt Expander into Mini vMac, so you can expand things there.