Grove Starter Kit Serial LCD v 1.1b - I Can't Get It To Work

Yes, use the sketch folder.
Add folder “libraries” to your sketch folder and put your library folders into it.
If you take it clean you can prevent issues.

All sketches in the sketch folder.
All additional librarys in subfolder libraries.
edit
i give you a example:
If you use windows xp in english…
arduino-1.0\libraries <— no changes in this folder, except you want to share the library with other users on your computer
C:\Documents and Settings\USERNAME.…\arduino\sketches <— your user sketch folder (choosen in arduino settings). Put your sketches into it
C:\Documents and Settings\USERNAME.…\arduino\sketches\libraries <— the user librarys folder. Put your library folder into it

a library needs this structure:
LibraryFolder
LibraryFolder\library.cpp
LibraryFolder\library.h
LibraryFolder\examples
LibraryFolder\examples\LibraryExample
LibraryFolder\examples\LibraryExample\LibraryExample.pde (or .ino with arduino 1.0)

You can read this on arduino.cc/en/Hacking/LibraryTutorial

If you would a clean install delete arduino… yes.

The problem is not Grove, the problem is arduino 1.0 :wink: