I was unable to find the settings folder either as described above, but I have Vista so the layout is different there. I was able to find the following, which I think is what you want, at least it seems to work for me. Try putting the hostiles file in /<username>/AppData/Roaming/Limewire. Since I never set my user name, my account is Owner.

I haven't used XP, so I don't know whether this will work there.