Unless things changed it's impossible to compile a player model using only milkshape.
I have written and hosted helpful tutorials on character compiling:
-You need at least 3D Max 4.x+ to rig and export a compatible .XSI file.
-There should be free version of Softimage XSI (there's a free package for creating HL2 content)
Actual character modeling tutorial:
under tutorials, character modelling (9 video files)