I created a directory in 'My Documents' named Arduino
the Arduino directory should already be there, that is where all the sketches you have created should be stored. If you needed to create the arduino directory then something is in the wrong place.
Have a look at the preferences tab (from the file menu in the IDE) and see where the IDE thinks your sketch files should be stored. This directory should already have existed. As mentioned in an earlier post, you should create the library directory (if it did not already exist) under the Arduino subdirectory indicated in the IDE.
Once you get the directories sorted you should delete any old copies of FrequencyTimer2 that may be in other directories so there is one copy.
For example of your arduino sketchbook location is:
C:\Documents and Settings\YourNameHere\My Documents\Arduino
Then there should be a subdirectory under this called Libraries :
And a subdirectory under this called FrequencyTimer2 that has the .cpp and .h files
\My Documents\Arduino\Libraries\FrequencyTimer2\ FrequencyTimer2.cpp
\My Documents\Arduino\Libraries\FrequencyTimer2\ FrequencyTimer2.h
You should delete any other copies of FrequencyTimer2 that may be in the directory where you installed your arduino runtime code.