From the Arduino instructions "Arduino Development Environment" at:
"There is a list of libraries in the reference. Some libraries are included with the Arduino software. Others can be downloaded from a variety of sources. To install these third-party libraries, create a directory called libraries within your sketchbook directory. Then unzip the library there. For example, to install the DateTime library, its files should be in the /libraries/DateTime sub-folder of your sketchbook folder. "
MsTimer2 is a third party library, so you have to create a folder to hold downloaded library folders.
Arduino 'core' libraries are located in a folder like: C:\Documents and Settings\Primary Windows User\My Documents\My Programs\Arduino\arduino-0018\libraries
I know that is a window address, but it should follow the same folder logic. You shouldn't add 3rd party libraries here because if you ever upgrade to a new version of the Arduino IDE (happens a couple of times a year or better) they will be have to be moved into the new IDE location. By using a library folder in your sketch folder it will stay and be avalible even after you upgrade the IDE.
Lefty