I was having the same problem many others were in resetting the Save Directory, but I have solved the error (at least for me).

My set-up: LimeWire 2.9.8 on Windows XP [HE]. Windows Media Player 9 and RealOne 2.0 are both in use. WMP9 is not the root cause. Windows Explorer and Microsoft's GUI design is the problem.

Here is what I did to fix the problem.

1. Create a new folder to which you'd like to save downloads.
Note: Just create a new one, okay (see endnotes). The folder in which I save my downloads is d:\music\_limey.

2. Go to the Command Prompt
Note: Start > Run > cmd.exe [gives you the command prompt]
If you are set-up as a computer administrator, you'll most likely be at the prompt, c:\Documents and Settings\default>. But it shouldn't matter.

Enter the following -- substituting your directory's name for mine -- after the prompt:

>attrib -r d:\music\_limey

This removes the read-only attribute of the folder. This cannot be done in Windows Explorer. Go figure.

3. Now, go to Limewire and set your newly created, non-read-only folder!

Tools >> Options >> Saving >> Save Directory >> d:\music\_limey

4. Adjust your players' settings to accommodate for this new directory.
Personally, the only use for my _limey folder is downloads. After I've downloaded songs, I use RealOne* to read them into the Library, edit the clip info (as is usually the case), and then I use RealOne's Tools >> Rename Files feature to create, in my case, Artist/Album folders, which I move to my d:\music folder. RealOne is smart enough to know that I've made this move and updates its library accordingly.
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*Does anyone have a link to a discussion or website reviewing all the players out there? I like RealOne but it is bulky and awful when doing networked database work. WMP is, well, its made by MS. Forget its name but I tried it 18-24 months ago, and it looked promising but had lots of work yet to be done, IMO. TIA.
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The [COLOR=orange-red]Microsoft warning[/COLOR] about doing this (below), which you can ignore if you created a new folder, and if you didn't, it's pretty harmless, anyway.

WARNING: If you remove the Read-only or System attribute from a folder, it may appear as a ordinary folder and some customizations may be lost. For example, Windows customizes the Fonts folder and provides a special folder view that permits you to hide variations, such as bold and italic. It also permits you to change the folder's view settings in ways that are specific to fonts. If you remove the Read-only and System attributes of the Fonts folder, these customized view settings are not available. For folders that you have customized by using the Customize tab of the folder's Properties dialog box, the folder icon and other other customizations may be lost when you remove the Read-only attribute.