I see that you (or someone) voted Sebastian Sedlak's answer down, because he mentioned hosting a WCF Service in the Windows Service. Your reply was
It's in nice bold lettering in the question. Not a Web Service, therefor WCF is out of the question
I think you misunderstood what he meant. He wasn't talking about a Web Service. He was talking about hosting a WCF Service within your Windows Service.
It's far from the same thing. You can host a WCF Service within any Windows (Forms/Console/Service) application. The point of doing so, is that the application is then reachable for communciation via its internal WCF Service, in the same fashion as you can communicate with a Web Service (you can also host WCF Services in IIS, btw, which would then make them "Web Services", in the sense you seem to be referring to).
In a Windows Service, this means you can send any command to it and also get any information you want from it - while it's running.
In fact, I am working on a project right now, which is a Windows Service that I need to be able to contact and pass commands to - and get information from - at runtime. For example, I want to be able to tell it where to store certain things, what to log, to have it reset/restart - and poll it for status messages. I do this by hosting a WCF Service inside the Windows Service. That WCF Service exposes a set of methods, that in my case includes receiving commands and returning status information. So when the Windows Service is running, I can contact it (even remotely), via its built-in WCF Service and tell it what to do.
This an extremely easy thing to implement, and in the case of Windows Services, can provide you with a much richer interface to the Service than through the basic standard commands.
However, you specified that you wanted your Windows Service to receive its folder settoings each time it starts up, which makes such a passive setup less than ideal (as it would be unable to do anything until you passed it the right folders).
One way to deal with this (using a hosted WCF Service), would be to have the Windows Service running all the time (i.e. automatic startup). Its default state would be idle. Then you could issue it a "start processing"-command, feeding it the correct folders to work on (through a call to the corresponding WCF Service method). Similarly, the WCF Service would expose methods giving you the status of the application (current folder, progress, busy/idle etc). Once the processing is done, it would go back into the idle state, waiting for the next set of folders to be supplied to it.
Doing it this way would make it very easy to control remotely - you could even make an online administration panel for it, accessible from anywhere.