Chuck are you installing this on a carterlake template site?
There are two sections in the readme file
Installation (carterlake php template sites)
and Installation (any other php template sites)
The step 6 you posted was from the second section, but to answer your question it would go in a Settings.php that is included before the header output.
Thanks I went ahead with the carterlake directions. As for the folder do you upload the entire folder as is so the other three folder inside would be sub directories.
If you have command line access to your server you can upload the compressed GeoLiteCity.dat.gz file and uncompress it.
or grab it with wget
If you are able to have command line, see here for instructions: http://www.maxmind.com/app/installation?city=1
Upload the following files to your web server where your template site is:
active_bot.gif
active_user.gif
inactive_bot.gif
inactive_user.gif
include-whos-online-header.php
include-whos-online-page.php
include-whos-online-settings.php
spiders.txt
whos-online.php
No, not the folder, I just changed Step 3 to say this:
Step 3)
Upload the following files to your web server where your template site is:
(root folder of your template site)
active_bot.gif
active_user.gif
inactive_bot.gif
inactive_user.gif
include-whos-online-header.php
include-whos-online-page.php
include-whos-online-settings.php
spiders.txt
whos-online.php