It wasn't working before version 3.8.x, but I don't know about 3.5.x . But as etvoila said, you can't really tell if someone is freeloading, since someone who is being filtered out because of the freeloader filter might just have reinitialized their HD and have 0 files to share. How would LW know that they are freeloaders or not? It's not a mind reading application. If you don't give them a chance to get some files to share then the network will suffer.
And about BitTorrent: it's a waaaaaay different app than LW. It wasn't concieved for the same purpose.

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iMac G4 OSX 10.3.9
RAM 256MB
LW 4.10.5 Basic
ADSL anything from 3 to 8Mbps/around 1024kbps

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