You have to add a search path for the directory where mtlFX.c can be found.
Probably in C:\Program Files\GStudio7\code ... if you downloaded latest beta.

Add the line with your path

Code:

---

///////////////////////////////
#define PRAGMA_PATH "%EXE_DIR%\templates\images";
#define PRAGMA_PATH "%EXE_DIR%\templates\models";
#define PRAGMA_PATH "%EXE_DIR%\templates\sounds";
#define PRAGMA_PATH "%EXE_DIR%\code";  // PATH TO YOUR mtlFX.c

#include <acknex.h>
#include <default.c>
#include "mtlFX.c"
///////////////////////////////

function main()
{
	level_load("terrain.WMB");
	wait(2);
}

---